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Looking forward to the UK’s economic recovery

For our latest ‘Coutts in Conversation’ event, Chair of NatWest Group Sir Howard Davies spoke to Coutts Chairman Lord Waldegrave about the state of the economy in the wake of the coronavirus pandemic.

Sir Howard and Lord Waldegrave both brought their long experience in policy and banking to the discussion, covering topics as diverse as the green recovery, the lack of a unified global response to the crisis and what the difficulty of finding a reliable plumber means for productivity and skills training.

The road to recovery

Sir Howard addressed the “alphabet soup” of projected recoveries – V, L and W all being plausible suggestions. He sees recovery coming, but maybe at a slower pace than anticipated by some.

“If you really nailed me to the wall, I am more of a U person. Because I think that there will be parts of the economy which will take some time to coax back into life. I don’t think that there will be as much travel. I don’t think that there will be as much visiting of busy restaurants.”

This is where the measures introduced by the chancellor Rishi Sunak this week could have some traction, according to Sir Howard.

“They may be working on a kind of nudge theory of the economy. To say to people, ‘Okay, you haven’t been out for a meal for four months, here’s a little bit of a discount to get you going.’ And you go and you find that it’s alright and you go again. And potentially that could be quite useful.”

Build back better

In response to a question from a client, Sir Howard addressed the potential for a “green recovery”.

“I do agree that there is an opportunity for economic restructuring in the light of the climate change imperative,” he said, “but I do think it’s going to have to be thought about in a way that recognises that it’s going to have to be the employment-rich bits of it in this environment.”

“Big transformations in the economy come at the price of disruption. And that comes at the cost of some unemployment. For the individual who loses their job, I don’t think they’re terribly interested whether their unemployment is structural or frictional or transitional. They just see that they don’t have any money and they can’t look after their families.”

To support a greener future while protecting employment in the short term, he highlighted policies aimed at boiler replacement or improving home insulation which can have a major impact on domestic energy consumption while providing employment. “Those kinds of initiative would really be a rational thing to do at the moment.”

Who will pick up the bill?

One of the key questions about the support measures put in place is the consequence of what Sir Howard referred to as “the super nova of debt” being taken on by the government. This raises the prospect of increased taxation.

“You can put taxes on, but that’s what we used to call austerity and there’s not much of a market for that at the moment in any part of the political spectrum. So I don’t think that’s going to be possible.

“Of course, the thing to note about this debt is that interest rates are so low, the debt servicing burden for the government isn’t worrying at the moment. It’s lower than it’s been at any time in the last thirty or forty years.”

This provides the government some room to consider different options. One idea floated by the chancellor is a “a debt servicing limit”, where government puts a limit on debt interest as a percentage of GDP. “If interest rates started to rise, then the government would have to act. But they could allow the borrowing to run for a while and allow the economy to recover,” said Sir Howard.

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