Is there a beacon of hope for the UK economy?
Darren Winters points out that few economies have had to grapple with the challenges of the UK economy over the past decade.
Since the 2008 financial crisis and the Great Recession, the UK economy has had at least four consecutive setbacks.
For example, the post-2008 slump in productivity growth, compounded by Brexit, the 2020 lockdowns, and a crash in GBP and the gilts triggered by the former PM, mini-budget attempts to spend more and tax less.
The UK economy has been stagnant with relatively high inflation since.
In the recent inflation surge of the past few years, the UK has fared poorly, with some of the highest inflation in the developed world.
The UK Consumer Price Index CPI, which measures the price for a basket of goods and services, hit an all-time high of 11.10% in October 2022,
Simultaneously, the UK had the lowest growth rates in the developed world.
End of 2023, the UK dipped into recession with GDP -0.3% in Q4 and -0.1 in Q3.
Could there be a beacon of hope for the UK economy as June’s inflation falls the most for the UK?
The CPI for June 2024 in the UK CPI was 2.0, France 2.2%, Eurozone 2.5%, Germany 2.2%, the US 3.3% core CPI excluding food and energy, Japan 2.6%
Source: Euro Stats, Office For National Statistics, Federal Reserve Bank.
So the UK CPI has gone from an eye-popping 11.10% in October 2022, the highest rate amongst developed economies, to a CPI of 2,0% in June, the lowest inflation rate amongst its peers.
Moreover, in Q1 of 2024, the UK economy grew 0.7% in Q1, 2024, then 0.6% in Q2, and is the second fastest growing economy in the G7.
GDP rose 0.4% in May alone, double what analysts were expecting.
So what is happening with the UK economy, and why did so many economists and traders who were quick to write off the UK economy get it wrong?
GBP has not crashed in 2024, which many, including me, got wrong.
Service sector, a beacon of hope for the UK economy
Most of the economic growth is driven by the UK service industry +2% in the last six months.
The UK service industry is the second largest exporter of services globally after the US.
UK service sector exports grew by 7% in 2023 alone.
Services include insurance, banking and education, legal, and accounting, all things which British companies provide to the rest of the world.
But the UK fared less well with exporting tangible goods, autos and energy, worse impacted by Brexit.
Service exports with buoyant demand for legal and accounting continue to be a beacon of hope for the UK economy.
Darren Winters explains that demand for services increases as economies advance, a trend expected to continue in the coming years.
Moreover, the service sector has proven to be more insulated against geopolitical competition than goods.
Global competition from China, the US and the EU for more manufacturing market share to become less dependent on outside supply chains has made manufacturing fiercely competitive.
For example, Germany is now competing with subsidized industries increasingly from both America and China.
So the service sector is less impacted by geopolitical frictions.
Paradoxically, geopolitical tensions provide a beacon of hope for the UK economy
Why?
The greater the geopolitical tensions, the more demand for litigation and insurance services grows.
The London maritime insurance sector is buoyant.
Historically, the UK, London has been at the centre of maritime insurance.
Lloyd’s Coffee House was an important meeting place in London during the 17th century.
Business people often visit this cafe to discuss marine insurance, ship brokerage and foreign trade to conclude profitable deals and cooperation agreements. These deals led to the creation of the insurance market Lloyd’s of London, Lloyd’s Register and several associated transport and insurance companies.
Geopolitical tensions and world wars are all tailwinds for maritime insurance as the higher risks increase the insurance premiums.
The Napoleonic Wars led to a boom in marine insurance.
The First World War again generated a great demand for insurance of goods at sea and on land against war risks.
The UK public and private partnership made maritime insurance even more lucrative for private companies.
The UK government took over 80% of all maritime risks, becoming the insurer of last resort but leaving 20% to private companies. As a result, private insurance brokers earned large profits while the government lost £ 7.5m in claims.
Socialising the loss and privatizing the profits, not much has changed. For the famous prestigious old Llyod’s names, and family dynasties going back centuries, maritime insurance, during geopolitical tensions, is a moveable feast.
Red Seas attacks on maritime shipping have increased insurance premiums for ships in the region.
In 2024, Average war risk premiums for one of the world’s most important marine trading routes cost of the Cost of Red Sea shipping insurance rose 2,700%.
“They might have started from a fairly low base, good value, but premiums tend to rise steadily the longer a threat persists,” said Neil Roberts, head of marine and aviation at Lloyd’s Market Association in London.
Insurance is unaffected by sanctions and covers both sides of a conflict. Western insurers cover two-thirds of Russia’s Baltic and Black Sea oil exports.
The sanctions on dozens of wealthy Russians in London are a cash cow for specialist legal experts in London and a tailwind for UK services exports.
With soaring geopolitical tensions, BAE System revenues and profits continue rising.
It ain’t over till the fat lady sings, and there could be a beacon of hope for the UK economy
But it might be wise to keep your optimism in check.
The UK is still the worst performer in the G7.
The north-south divide is also problematic.
London and its yuppie may be doing okay and prosperous, but the UK North is getting poorer.
Perhaps the UK is united in name only, and the ongoing UK riots, deeply rooted in Anglo-Saxon hegemony, flag fractured domestic social cohesion fussed with immigration integration issues.