Money & Markets: The return of the roaring twenties
The government’s large majority gives it licence to change economic policy and spark a boom that should benefit engineering and technology companies.
Engineering and technology are very sensitive to the underlying economic environment. When governments tighten or loosen their monetary policy, there are dramatic effects, and historically companies take the brunt of it, which in turn leads to shifts in employment.
Engineering and technology companies are particularly sensitive to interest rates and in the modern economic realities, liquidity, which basically means the ability of entities to get their hands on cash when they need it. There are few companies that can survive without credit, and credit must be refreshed. Without liquidity debts can’t be rolled and companies go bust. It is debatable whether there are any companies in the FTSE 250 or 350 that could survive a credit freeze, in the same way that there are few rich people who could repay all their debts on demand.
That means the configuration of credit is basal to everything.
By the time you read this, Britain’s formal departure from the EU will be imminent. I wrote several years ago in this column that Brexit was unlikely to happen and was pooh-poohed. I think the difficulties getting to Brexit make that prediction seem less outlandish now than it was back then! Even so, as I write it seems that a Brexit is on the cards.
This might seem very bad news for all those engineering companies whose biggest market is Europe. There are all sorts of disruptions ahead.
With an economic steady state this would indeed be a grim prospect, but something else is afoot and it could be tremendous.
The new government with its large majority is unfettered. It appears likely that what is ahead will be a significant break from the past, not only with the disconnection of the UK from the European Union but in economic policy.
The UK was trying to emulate the Germans and get to a position of fiscal balance. That, under the previous leadership, meant that the budget deficit of the UK was 1.5 per cent of GDP. That was seen as laudable before the global financial crisis, but doesn’t make any sense to the new school of economics, which sees money as more of an idea than something evolved from lumps of gold. Simply, China, Japan and the US run a fiscal deficit of about 4.5 per cent of GDP. The gap between the UK’s performance and the largesse of the top three economies is equivalent to 3 per cent of GDP for the UK or £60bn.
This £60bn is up for grabs in a post-Brexit support operation. For further fuel there is perhaps another £100bn not spent in the last few years to add to the blaze – and that is before the UK might look to ‘quantitative easing’.
Essentially, there is a huge reserve of resource to throw at riding out the Brexit shambles that is highly likely to ensue.
It would take a brave pundit to predict that the current government does not have the nerve to go for broke in a post-Brexit economy, so it is pretty likely that a firehose of money is about to be unleashed. Up will go the FTSE like a homesick angel. It will be ‘party on’ for the UK.
Many will be grumbling that there will be hell to pay if that is what is going to happen, and they may be right, but it will not happen within the five-year lifetime of this parliament. We will be in for a boom and a bubble.
Now the adverse impact of Brexit may truncate that to merely a bump and a boom but clearly the whole future is one of higher risk. We are taught, of course, ‘risk equals reward’ and over a whole economy that should lead to a stronger overall result punctuated with islands of woe where risk actually delivers a smoking crate outcome.
This being said, the spoils of this reflation will go to the economically active, and we would hope that engineers and technologists are sitting in the sweet spot of this.
Money will flow and it will flow via fiscal and monetary policy to those that can put it to work.
For lovers of hard money, this laxity will be heretical. However, in this new model, the rich get their benefit from high-end asset inflation in equities and bonds, the middle class get their payoff from the appreciation of housing and those at the base of the economic pyramid get all the gainful employment they need, all offset by the economic drag of a lumpy Brexit.
In summary, rising tides raise all boats, as the market saw goes, and that tide will be a reflation to counter the effect of Brexit by using the spare monetary capacity laid in by the previous Conservative government who were perhaps too wedded to the old way of running an economy to put their foot on the accelerator and go for growth.
At least for a few years this is going to create fast times, and those that want to catch this economic wave should get ready now, because in markets it is always better to get in at the bottom rather than being the last to arrive at the party, just as the lights are about to go out.
The twenties, once again, are about to be roaring.
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