Moving On: Navigating The Challenges In An Uncertain Economy
Ros Altmann
There’s no doubt that the post-Brexit scenario means the UK is facing significant economic challenges, affecting people and businesses. Since stepping down as minister, I’ve been focused on helping people get better value from their savings and encouraging pension businesses to understand how to relate better to customers.
I’m also involved in looking at the potentially dangerous consequences, for interest rates, markets and the economy, of the Bank of England’s quantitative easing (QE) policies. QE has injected newly created money into the economy by purchasing government bonds. Originally designed to stave off deflation in 2009, the last round of QE aimed to help growth during the pandemic. It successfully lowered bond yields, which also supported equity and property markets, but the constant central bank boosting of asset prices has also led to rising debt levels and inflationary pressures.
Since last year, central banks have started trying to unwind the monetary stimulus and move away from years of excessively low-interest rates by raising short rates and selling the bonds they purchased. It is unclear what this withdrawal of liquidity will mean for interest rates or markets. Younger people have increasingly struggled to get on the housing ladder, so lower property prices or rents might be welcome, but if mortgage interest costs rise sharply, that may not help them.
Newly ‘printed’ electronic central bank money buying bonds, coupled with pandemic dislocations and the Ukraine War, has fostered an inflation crisis. QE did improve market confidence, but it also facilitated massive expansion of government borrowing and rising debt across the economy. If markets begin to worry that debt levels are becoming unsustainable, investors could suddenly take fright, causing another crash. We had a foretaste of this last September after the ‘Kami-Kwasi’ budget.
In this scenario, a market collapse may then see policymakers reaching for their first port of call – expecting the central banks to print more money. This may not be sustainable ad infinitum, and ultimately may even lead to coordinated global action to reschedule maturing Government bonds. Either way, the fallout could well mean interest rates won’t rise as much as currently expected and stay lower than inflation rates would normally suggest. This offers some hope mortgage holders.
As QE is running out of road, there are other policies which could help revive the economy. Closer trading relationships with the EU would undoubtedly help an economic bounce-back, and the recently-agreed Windsor Framework for Northern Ireland is positive in this regard.
More tax reliefs and incentives for business investment are important to growth. With an election looking likely in 2024, government policy and planning will seek to ensure sustainable economic recovery but the Chancellor may, for political reasons, leave the biggest policy expansion till later this year, in order to drive a stronger recovery pre-election.
There are, however, other policy tools for boosting UK growth, rather than relying on fiscal and monetary policy. As one of the leading global financial centres, there are hundreds of billions of pounds in funded UK pension schemes. But this money is not invested to boost growth. Rather than supporting the development of new businesses, or building much-needed infrastructure and social housing, regulatory diktats have driven pension assets towards supposedly less risky investments in bonds, which have actually delivered low or even negative returns as inflation and interest rates rose.
Of course, economic weakness is a concern for all generations, but under-currents of intergenerational conflict have been bubbling, as younger people, who tend to own few assets at the start of their working life, believe they have lost out unfairly from rising asset prices. However, we are a country with massive divides and far from all older people are well-off, nor did they have the opportunities, freedoms and support that younger people now enjoy. QE made asset-owners, younger and older, better off, but what happens next? Unwinding QE involves depressing bonds, and younger people might have an opportunity to buy assets at lower prices in future. The cost of borrowing will be a key factor here.
Ensuring individuals have access to financial education could be another powerful tool to help improve economic performance and ensure people add more value in the workplace. I believe there should be an obligation on financial services providers to help people understand finance and to facilitate it through the workplace as well as in places of education.
There are slowly emerging signs to encourage both individuals. The trustees and managers running these schemes are beginning to recognise that much of this pension money will be there for the long run. Even when people take a pension, it will be drawn over many years. So, investing in a project that has a ten-year payback is actually a good idea, and if you can boost growth along the way for the whole economy, that’s good news as well.
As we move on from QE, encouraging pension funds to invest more in long-term growth-boosting assets, as well as educating more people about finance, can drive better decisions about financial management and support domestic investments.
