Taking a risk

February 4, 2025
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Since launching Woodford Views, I have tried to tread carefully when dealing with potentially controversial subjects. I haven’t compromised on the content and have stayed true to what I believe, but my tone has always been moderate. This is probably the product of a professional life lived under the gaze of regulation, content moderation and having worked in an inherently conservative industry for over forty years. But in keeping with my naturally more combative style and reflecting my increasing frustration with the appalling misinformation politicians and the media bombard us with, I thought the time had come to be a bit more, well, punchy.

In doing so, I hope I don’t offend, but I intend to try, albeit in a very small way, to counter, with a bit more vigour, the depressing and overwhelmingly negative drivel constantly rammed down our throats about the UK economy. Our economy is undoubtedly confronted by many challenges, including dreadfully poor and unimaginative political leadership, but despite all this, it has still performed way better than most would believe and is much better positioned to continue to do so than we might imagine.

In this blog, I will present some facts (the market for which seems to be vanishingly small) on some key but controversial UK economic issues. Having done so, I hope it will become obvious how policy should evolve to deliver the future growth politicians keep talking about.

First, to recent history. Some might argue that this is irrelevant, but to quote Maya Angelou, “you can’t really know where you are going until you know where you have been”.

Let’s start with the facts. This is a chart of aggregate GDP growth from Q1 2010 through to Q4 2023 for the UK economy and its developed economy peer group.

GDP growth from 2010 to 2023 for the UK and its peers. The UK is 'best of the rest' after the USA and Canada.

Unsurprisingly, the US economy tops the table, along with Canada, the “51st” state. What may surprise you is that the UK comes next. It has outperformed its EU peers, including Germany, the Eurozone, and Japan.

So, the next time you hear a politician talking about the dreadful economic legacy of the last fourteen years or even the disastrous economic impact of Brexit, know that their point of reference must be the US economy and not the rest of the EU, which the UK economy has so handsomely outperformed. I suppose the truth here is that the consensus is just wrong about the UK economy’s performance in recent years. It clearly could have been better and might have been had we followed a more US-centric economic model, but it is nowhere near as dire as many would have us believe.

Some would rightly argue that the “real” outcome is not as good as it could be on a per capita basis because the UK has seen strong population growth over this period (over 10%), largely due to net migration. However, all of the developed economies listed in the graphic above confront this same challenge, except Japan, whose population has fallen by about 4 million since 2010 and where net migration is tiny.

This is a very thorny issue but of fundamental importance to the outlook for the UK economy. From my perspective, it is a debate that too often fails to consider all the interlinked issues that influence the perceived need or benefits of net migration in an economy where deaths and births are roughly equal. And so, as is often the case in economics, the facts are overlooked.

The first and possibly most important fact is that the population of the UK, over a ten-year period to 2032, is forecast by the ONS to increase by 5 million, or 7.4%, to 72.5 million. The ONS estimates that all of this growth will be accounted for by net migration. Advocates of the benefits of net migration will argue that we need to attract workers to the UK to deal with the growing healthcare burden of an ageing dependent population. They might also highlight that the NHS employs 300,000 more people than before the pandemic.

These are valid points, but there are fundamental issues we need to address first before concluding that there is a need to attract foreign workers and their families to the UK to do the jobs that our home-grown workforce seems unable or unwilling to perform. For example, it begs the question, “given the UK’s scale of labour market inactivity (see below), is this life choice not to work the product of more widespread incapacity or of a benefits system that has made it too easy to choose not to work?” It also begs the question: “how are stretched public services going to cope with the healthcare and educational needs of an additional 5 million people in the UK?”.

And with respect to housing, how can a sector currently only building about 150,000 new homes a year cope with the need to house an additional 5 million people on top of an assumed existing shortage of new housing? These and other questions remain unaddressed too often in the politically charged debate about immigration.

Here is a detailed breakdown of the UK's 16- to 64-year-old population in November 2024 to help put these numbers into perspective.

Breakdown of the UK's 16 to 64-year-old population
Thousands November 2024
Population aged 16 to 64 43,060
Employed 32,227
Unemployed 1,529
Economically active 33,756
Inactive 9,304
Students 2,463
Long-term sick 2,813
Temporary sick 215
Looking after family 1,681
Retired 1,067
Other 1,040
Labour market inactivity in the UK. It's 3/4 of a million higher than before Covid-19but starting to fall.

It is noteworthy that a very large number of people are registered as long-term sick. This number had been falling consistently before the pandemic but is now 800,000 higher than in 2020. The huge increase in student numbers over the last twenty years is also noteworthy, especially in the context of the very low labour market participation rate of the 18-24 age group, which, surprisingly, is now below that of the 50-64 cohort.

Participation rate by age group shows less than 70% of 18-24 year olds are now participating in the labour market.

It seems to me to be entirely reasonable and sensible to ask policymakers why further significant net migration into the UK is appropriate when we appear not to be making the most of our existing workforce. Surely, in the first instance, we need to look at our tax and benefits system to properly evaluate whether we have the right incentives for work in place, whether too many young people are incurring significant debt to achieve degree-level qualifications that appear not to be valued by employers and critically, how the UK’s already overburdened public services and housing infrastructure could cope with an additional 5 million people. These questions clearly also impact the current debate about the UK’s public finances, which I have commented on recently in a number of blogs and will briefly return to here.

Again, looking at the facts can help contextualise this whole issue. To start with, it’s clear that the government has decided to significantly increase public spending. This should not surprise anyone; it’s what Labour governments do. To finance this increased spending, the Chancellor has announced higher taxes and borrowing. This is all shown clearly in the charts below.

Financing the deficit. The Labour government announced a significant increase in spending, paid for in part by higher taxes and higher borrowing. The government is leaning on debt markets to fund its plans.

Much media commentary has been focused on the increase in public debt which has followed the government’s decision to spend more money. Many have argued that the higher level of borrowing is reaching dangerous levels and that the burden of increased gilt issuance will result in higher borrowing costs, which will further stress the public finances and result in even higher levels of taxation. I hope I have demonstrated the numerous holes in this apocalyptic argument in recent blogs. I won’t repeat them here, but suffice it to say that the deficit and the debt to GDP ratio in the UK may well be high, arguably too high, but both are nowhere near the levels that might trigger some sort of financing crisis. The two charts below will help to put some context around this debate.

Government budget and deficit from around the world. The UK's deficit and debt are high but nowhere near crisis levels.

Last week's 14x oversubscribed 15-year gilt auction and the ten-year gilt yield, which is back down close to 4.5%, will puncture the more alarmist commentary that dominated the headlines a few weeks ago, at least for now.

Having said that, though, I am no fan of this administration’s tax-and-spend philosophy. Ultimately, a more bloated public sector and higher taxes are not compatible with higher growth. What the UK economy needs is a lower tax burden on private enterprise, less regulation, and a more productive public sector, not a bigger one. Interestingly, this challenge, among others, is currently preoccupying much of the political debate in Europe.

The Labour government seems to have ignored these crucial lessons of economic history. Instead, it has chosen a path that will, I believe, handicap the economy’s ability to grow and raise living standards. Nevertheless, despite these concerns, I remain relatively optimistic about the growth outlook over the next two years and certainly more upbeat than a very crowded consensus view. I will briefly explain why.  

First, although the budget was, in my judgment, a profound mistake, the simple reality is that higher government spending will lift economic growth this year and next. (It is spending more than it is raising in tax.) Secondly people in work are seeing significant real, post-tax earnings growth. Thirdly and critically, interest rates will be falling consistently this year, starting this week and continuing through the year. I expect we will exit 2025 with rates below 4%. Inflation will remain contained, rising a little in the immediate future and falling back towards the 2% target later in the year. This fall in base rates is critically important not just because of the resulting fall in borrowing costs, which will help the housing market, but also because it will reduce the incentive to save. Currently, the saving rate in the UK is very high (see below), which reflects the appeal of high real rates available on demand and fixed deposits. The reality is that it is too high, evidenced by the very significant growth in bank deposits and the huge sums that have been invested in cash ISAs in recent years (£100 billion over the last two years). If the saving rate were to fall due to lower interest rates, the resulting increase in spending would lead to significantly higher forecasts for growth across the board.

Household savings ratio is levelling off. Households are still saving at a historically high rate but if interest rates fall as expected, this will reduce the incentive to save.

As usual, this note has ended up being longer than I had planned. Nevertheless, if you have had the patience to read this far, I hope you are persuaded of the case for a more upbeat outlook on the UK economy despite the challenges posed by a daft budget and an overwhelmingly negative consensus media narrative.

This new government has many problems to contend with, not least the need to solve for the very contentious ongoing challenge of net migration. In the short term, the chancellor will have some thinking to do when the MPC and the OBR both downgrade their growth forecasts for the UK economy in the next few weeks, which will, of course, undermine yet again the administration’s claim to be focused on delivering growth. This may even force her to contemplate spending cuts, having only just announced a significant increase in spending a matter of a few weeks ago. Maybe, as Rachael Reeves thinks about how to dig herself out of this new hole, she might, at last, consider doing things that really would help the economy instead of talking about infrastructure projects that, in all likelihood, won’t even start until the next decade is well underway.

One final point to consider is the impact of a better economic outcome and lower interest rates on the UK equity market. It may surprise seasoned market watchers, but the year has started quite well, and shockingly, the UK index has outperformed the S&P 500 so far in 2025. One swallow doesn’t make a summer, but I will take this good start as a positive omen for the year ahead.

Disclaimer: These articles are provided for informational purposes only and should not be construed as financial advice, a recommendation, or an offer to buy or sell any securities or adopt any particular investment strategy. They are not intended to be a personal recommendation and are not based on your specific knowledge or circumstances. Readers should seek professional financial advice tailored to their individual situations before making any investment decisions. All investments involve risk, and past performance is not a reliable indicator of future results. The value of your investments and the income derived from them may go down as well as up, and you may not get back the money you invest.

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