London, Asharq Al-Awsat- I was asked to share my observations on Britain’s economy this week. I hope to cover more than the global debt explosion.
Louis Pasteur, the 19th century French chemist and microbiologist, characterised chance when he said, “In the fields of observation chance favours only the prepared mind”.
Britain is a country that has always been observant, and developed a “prepared mind”. Opportunity and risk are two sides of one coin; today that coin is observation. From the Second World War Britain has been a country observing, and avoiding, risk: first of invasion, then of bankruptcy, then in a vulnerable position during the cold war. Britain responds by observing, and then grasping, opportunities: to position itself at the forefront of the opening up and migration of capital now reshaping the world, to develop its financial services, to become a knowledge based economy, to develop its creative industries, its healthcare industries, its high-tech industries.
As a member of the EU, Britain is part of a single market that ensures the free movement of people, goods, services, and capital within member states. This allowed Britain to attract talent from many parts of Europe, to develop in many ways and to grow its already dominant position as one of the world’s leading financial centres. It is also perhaps the world’s most open society.
As a result Britain became a bigger economy than Italy in the final months of 1997 and two years later became a bigger economy than France, thanks to strong British growth and a high Pound Sterling. A year ago Britain’s economy was 8 percent bigger than that of France, measured by GDP. Exchange rates are altering its relative ranking but ranking is not particularly important, except to some economists.
The more important point is that Britain still maintains its own economy and has chosen to continue using the Pound Sterling as its national currency rather than converting to the Euro. This permits flexible monetary policies that are not accessible to eurozone members.
More importantly British government bonds are attracting strong support, in sharp contrast to their troubled eurozone peers as investors seek a safe haven from a debt crisis now spreading to Italy, Spain and even France. The British Government has never failed to make interest or principal payments on UK Government sterling denominated bonds, issued by Her Majesty’s Treasury, (Britain’s ministry of finance) as they fall due. Investors are also reassured by Britain’s determined efforts to slash state debt and avoid the severe troubles of the crisis-hit eurozone countries.
British 10-year government bond yields last week tumbled as low as 2.1 percent and stood only slightly higher at 2.2 percent by Friday. By comparison, the yield on Italy’s 10-year government bonds topped the 7.0 percent danger level considered unsustainable for Rome to service its huge debts while Spanish rates have also approached this crucial point. German 10-year yields, the rate of return earned by the holder of the bond, stood at 1.9 percent last Friday, with France at around 3.5 percent.
I think being outside the eurozone is a key factor in the strength of the UK sovereign market. The effective devaluation that Britain has managed during the past few years has saved it from the problems that other countries are experiencing. In contrast to the European Central Bank, the Bank of England has been willing to buy up vast swathes of UK government debt.
Many people are talking about problems and not observing the opportunities that are here in the British economy. Of course financial services have suffered but it is still a global leader and talented people want to work in Britain. Financial services account for 10 percent of UK GDP and 11 percent of UK tax receipts. It employs 6 percent the Britain’s working population. The volume of UK financial services business rose in Q3 for the ninth quarter in succession, although the rate of growth has been moderating in recent quarters.
A healthy economy needs a healthy financial system – it helps businesses to invest and grow, undertake day-to-day transactions and manage their risks, underpinning activity in every part of society. The financial services industry plays an important role in supporting UK businesses and enabling the UK’s economy to grow. The products it offers are a significant part of the UK economy in their own right, and form one of Britain’s world-class sectors.
Sometimes people think that finance is all that goes on in Britain. How wrong they are!
Many opportunities have arisen from the devaluation of Sterling for investing and for exporting.
The Export Credit Guarantee Department, which insures exporters against the risk of their overseas customers failing to pay is again a world leading ECA, and is to be rebranded as UK Export Finance.
Many people know about the UK Real Estate investment opportunities with its appeal to Arab financiers. It is reasonably priced now for currencies not pegged to Sterling, but still operates through the world’s safest institutional leases with full repairing and insuring terms. While many people know about the London market, there are outstanding opportunities in Britain’s other major cities where yields are higher. I know of many, including a new hotel development opportunity in Manchester that we are involved with.
Over the last 10 years, and as a result of the 1980s investment in knowledge based industries, the British fashion industry has evolved from a domestic manufacturing based industry into a design-led industry operating in a global marketplace. High end products continue to be made in the UK and ‘Made in Britain’ is still a strong sales point. There are substantial opportunities for people to become involved in this growing success.
The creative industries, ranging from advertising to architecture and fashion to film, constitute one of the fastest-growing sectors in Britain. The creative industries contribute 6% of GDP and employ over 2 million people, many more that financial services. The sector is forecast to play a bigger role in coming years.
The UK has a strong design talent, led by its excellent art colleges, which are famous throughout the world. They attract many talented students from numerous countries who go on to work in global fashion houses.
Life Sciences in Britain is a world leading industry with over 3,500 Medical Technology and Biotechnology companies. Combined with pharmaceutical exports Britain is a major supplier of Life Sciences products and services across the globe. Purchasers and procurers around the world source healthcare products, services and technologies from a wide range of British companies. Global Research and Development organisations look to Britain to establish partnerships with companies which have novel technologies and platforms to increase the pace of product development.
Advanced engineering encompasses all that is great about British manufacturing. Be it in aerospace, automotive or any other field of engineering, Britain benefits from world-class capability in advanced engineering. The wings and engines of so many aircraft are designed and manufactured in Britain and our automotive sector is taking a lead in the development of low-carbon vehicle technologies.
So to conclude this observation about British’s economy, I believe there are reasons for optimism for those who also have a “prepared mind”.
• Sir John Davie is a visiting Professor at London metropolitan business school and a the head of Ultra Capital