Industrial exports are the engine of developed economies. Ours has stalled

Downing Street must add the likelihood of a UK recession to its list of possible scenarios after official figures showed that the economy contracted in the second quarter by 0.2%.

The prospect of a further decline in GDP in the third quarter, which would make a recession official and might be clearly on the cards before the 31 October Brexit deadline, should dominate the prime minister’s deliberations.

All areas of the economy shrank except the services sector, which managed to inch ahead by 0.1% in the three months to the end of June.

There are those inside No 10 who dismiss the figures as merely the result of Theresa May’s failure to push her withdrawal deal over the line in March.

They murmur privately that the aftermath of this debacle was likely to provoke economic volatility as companies and consumers reacted first to parliament’s refusal to back a deal and then the uncertainties created by the Tory leadership elections and the perceived intransigence of European Union leaders.

And casting an eye over the past year rather than the past few months alone suggests there is something to the argument that the economy is stronger than it looks.

GDP increased by 1.2% in the 12 months to the end of June, and is still on schedule to grow by at least 1% over 2019 according to most forecasters. Compare that figure with the annual growth rate predicted for Germany of just 0.5% and 0.1% in Italy.

Yet to dismiss the deteriorating economic situation as a symptom of Brexit uncertainty – one that will be fixed automatically once the dark cloud of Brussels’s influence has been lifted – is to ignore some unsettling economic trends.

Donald Trump’s tariff wars have provoked slowdowns in output across China and the far east. Concerns that a slump in trade will lead to a global recession have heightened and spurred central banks across the world to cut interest rates at the end of last month.

Read More   Anthem quarterly profit beats estimates, raises 2018 forecast

The UK’s GDP figures show that in 2017, when a smooth exit from the EU was in prospect, businesses increased investment in capital goods by 3.5%. In 2018 that figure had slumped to 0.2%. In the last quarter, firms cut spending, which led to a 0.4% decline on the previous three months.

It’s possible that industrial firms could emerge, phoenix-like, from the ashes of 31 October to invest again. But unfortunately, their longer-term position has become steadily weaker.

UK companies have been borrowing heavily since the 2008 crash. Most of the funds have been used to pay generous dividends, rather than being ploughed into new equipment or research and development.

According to analysis of industrial companies by US risk assessment company Credit Benchmark, British firms have allowed their financial situation to deteriorate to such an extent that they are much more vulnerable to a shock than their peers in Europe or the US.

Credit Benchmark’s risk indicator shows that EU companies, acting prudently to shore up their finances, have cut their borrowing since 2016 to the extent that their credit risk has improved by 10%. Over the same period, UK industrial companies have allowed their credit risk to deteriorate by 25%.

This trend cannot be said to provide a springboard for growth. Maybe Britain can prosper without an industrial base, just as the small group of economists that support Brexit believe. Few others would agree. Industrial exports remain the bedrock of developed economies. And for that reason a recession in the autumn should be taken seriously as an indication of the UK’s underlying weakness.

Fancy a punt on lawsuit finance? Look where it got Neil Woodford

In the film Erin Brockovich, Julia Roberts plays the gutsy legal clerk who wins payouts for a Californian community devastated by water contamination from a giant utility company. Less is said about the extraordinary $134m her law firm scooped from the case.

Read More   Check out the hot cars at Chicago's auto show

Brockovich is the socially acceptable backdrop to the huge new industry of litigation finance, where large sums are spent on speculative court cases in the hope of a bumper payout. They are mostly dreary commercial cases where neither side occupies the moral high ground. Lord Turner famously dubbed much of the City’s financing activities as “socially useless”, and critics might say the same of litigation finance.

This speculative activity has now formed a new asset class. Fancy a punt on court outcomes by buying shares in firms that pursue these cases? Thought not. Yet it has emerged that beleaguered fund manager Neil Woodford had put his investors’ money into such firms.

Woodford owns 7% of Aim-listed Burford Capital, which, until last week, has enjoyed a breathtaking rise in it share price. Its major court action is a complex oil case involving Spain, the US and Argentina. Some say a $10m investment by Burford could see a $1bn payout.

Others are less confident. A hedge fund that speculatively attacks firms to drive down their share prices and cash in by short-selling has targeted Burford. The irony is not lost on many. Burford’s share price crashed by 60% when the hedge fund, Muddy Waters, alleged that it was “a perfect storm for an accounting fiasco.” Burford furiously responded, threatening legal action.

But it is Woodford and his small investors who are now suffering the fallout. The former “star” manager had made a string of dud investments. Burford was one of his few bright sparks. The lesson? Litigation finance is only for punters and speculators, not long-term investors.

The super-rich are getting out, and it’s not over Brexit – or Corbyn

In another sign that the super-rich have had enough of Brexit Britain, 6,000 non-doms – those who live in the UK but pay no tax on their offshore income – have ditched Blighty for, presumably, another locale that promises to turn a blind eye to taxing most of their vast fortunes.

Read More   Costa Coffee customers angry as broken machines leave them unable to claim free drinks

Treasury figures revealed last week showed the number of non-domiciled people in the UK dropping from 98,500 in 2016-17 to 78,300 in 2017-18. Advisers to the super-rich pounced on the news as a sign that their clients, many of whom supported Brexit, have lost faith in the UK and are taking their money elsewhere, leaving the exchequer £2bn poorer.

But Brexit paralysis is not, apparently, the main reason for the exodus. For the super-rich there is a fate worse than a hard Brexit, and that’s a government that promises to tackle the widening gap between rich and poor. With the prospect of an early general election, many of the super-rich are not willing to wait around to take the risk.

Jeremy Corbyn has vowed to introduce “wealth taxes”, such as reintroducing the 50p income tax rate for those earning more than £123,000. Labour has also mooted tighter rules on inheritance tax and pledged to start levying VAT on private school fees.

Those HMRC figures, however, are for non-doms who left before April 2018 – some 16 months ago, when the prospect of a Corbyn-led government seemed more remote.

Perhaps their motivation dates back to the changes introduced by George Osborne. The former Conservative chancellor introduced new rules to crack down on those abusing non-dom status to avoid paying their fair share of tax.

“British people should pay British taxes in Britain – and now they will,” Osborne said when he announced a crackdown on permanent non-dom status in 2015, two years before it came into effect. “It is not fair that people live in this country for very long periods, benefit from our public services, yet operate under different tax rules from everyone else.”


Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.