The Road To Success


It has been a tumultuous year. For the UK, the privations forced upon it by the economic and social restrictions necessitated by the pandemic have been exacerbated by the uncertainty caused by the new trading arrangements consequent on the country’s exit from the European Union. While, for most countries, a post-pandemic return to normal will not see an exact re-establishment of the old order – in many areas, there will have been permanent changes to the old status quo – for the UK, it will be much more of a step into the unknown. Here, it has been impossible to separate the impact of the lockdown from the effects on the economy of Brexit. That our economy had a rougher year than others in 2020 seems confirmed by the GDP data. But is this because the nature of our economy leaves it more exposed to shocks or because, not far under the surface, Brexit was already having a debilitating impact even before the final withdrawal terms were hammered out? We cannot know.


Reorganisation and realignment

However, as the chains that have shackled the economy are loosened and removed, we will soon begin to understand the challenges that lie ahead. This will be true for individuals, businesses and government. That some reorganisation and realignment will be required is beyond doubt; the necessary extent will become manifest during the remainder of 2021 and into 2022. In determining what needs to be done, it is important that policymakers do not forget the situation prepandemic. It is tempting to think that all we need to do is, as near as we can, get back to where we were, albeit outside the EU’s single market. But we must not forget that the decade following the global financial crisis was characterised by a sustained period of sub-normal growth. We still do not fully understand why.


Quantitative easing

Throughout the period, monetary policy appeared massively expansionary. Quantitative easing was not reversed (and continued in some areas) and interest rates remained exceptionally low. Did substandard economic performance persist despite this continued policy stimulus – a conclusion with implications difficult enough for central banks – or worse, was low growth the consequence of the low-interest rates regimes maintained almost universally in developed economies? The latter is clearly a much greater challenge to established economic wisdom. However, I am firmly of the view that by forcing the risk-free rates of return into negative territory in real terms, central banks created an era of lazy capital. They removed the challenge to companies to grow in order to produce returns sufficiently attractive for investors to take risk. Growth requires investment – currently, however, investors would prefer companies not to invest but to channel cashflow into dividends. Western economies will not remain permanently moribund. It is ironic that for a while, the recovery from Covid-19 damage will itself provide the challenge that stimulates above-normal investment and growth. In the UK, the bar representing that challenge will be all the higher as companies face up to the new order of the post-Brexit world. What should policymakers be doing to facilitate this process? The important word here is ‘facilitate’. Governments and central banks do not themselves produce growth. People and companies do that. But they do it in an environment that either encourages or discourages their activities.


Infrastructure growth

I would like to see government policies that are fully focussed on developing the growth infrastructure of the country; on helping the emergence of a high-valued-added economy. This starts with education, and fashioning a school, college and university system that cultivates in individuals the requisite skills and aspirations. A curriculum has to be developed that is interesting and relevant and that encourages attainment. Too many of our young people emerge from the educational system having already under-achieved and without the skills required to progress in the workplace. For so many of our young, the possibility of creating their own business is just too far over the horizon. Simultaneously, the government must address the business infrastructure. In some respects, this may be as simple as developing the right road, rail and air networks. But it must go so much further; so much deeper. The government can create the environment for centres of excellence to develop. The speed, resilience and security of digital communications must be at the heart of this. Numerous government initiatives aimed at bringing high-speed broadband to 100% of the country have been allowed to fall by the wayside; and there are still many areas where mobile communications are patchy or non-existent (including in some major towns and cities). The UK must be able to encourage new start-ups and attract businesses from abroad with the promise that the communications network will be second to none.


New business formation

At the core of this must lie a deep understanding of what encourages new business formation – from start to finish and for large, small and micro businesses. This begins in our education system. It is not simply a matter of producing a workforce with the appropriate level of skills; as part of the curriculum, young people should be taught how to setup and run partnerships and small businesses. There should be agencies to help guide people through these processes and to help them source finance (in this context, central banks need to understand that it is most often not the price of money that is important, but the ability to access finance). We need a broad web of economic centres where it is straightforward to develop a site for a new business operation or to find appropriate office space. This requires a planning system that is fit for purpose. And we need a tax system that encourages research and development, investment and entrepreneurial activity. In other words, the government must be focused on lowering the barriers to growth with coherent, joined-up policies that seek first to unlock and then to maximise potential throughout society and throughout the economy.



The bottom line is that for the UK to be successful in meeting the challenges ahead (from whatever direction they may come), the government must change attitudes towards wealth creation and then cultivate a broad infrastructure within which this can thrive. The extent to which this is achieved will determine the extent to which the huge national debt currently being accumulated is a long-term burden or a medium-term annoyance.



Richard Jeffery

Investment Committee Chair