The cornerstone of all wealth generation is how to raise average productivity levels through encouraging significant investment in both capital and labour.
Going forward this is likely to involve a rebalancing of the economy away from a reliance on the service and financial sectors.
During the decades of globalisation, plentiful growth became routine and this led investors and governments to become less attentive to policies that drives productivity improvement. After the Global Financial Crisis the focus on productivity improvement has fallen further down the list of priorities given the urgent need to avoid a depression, and need to stabilise of the banking sector.
However, since that time ultra-low interest rates and QE have become politically expedient. The flat-lining of UK productivity growth has been neatly offset by the benefits of UK bond yields falling to multi-decade lows. The steady reduction of UK bond yields has kept the economy ticking over and house prices and asset markets appreciating nicely.
The failure to tackle the productivity slowdown has been coming through with real incomes increasingly being squeezed. This has been changing the nature of the UK political debate with focus on the distribution of the existing national income rather than growing incomes in aggregate through renewed productivity growth.
Following the UK election, the Conservatives are now more vulnerable to ‘pork barrel’ politics where they need to fund DUP and Scottish Conservatives special projects.
However, the magic UK ‘money tree’ is not looking particularly healthy. Whilst debt appears to be costless, UK debt as a percentage of UK GDP still remains close to the highs reached in 2008. And, whilst the UK budget deficit has been reduced over recent years, it is still running above comfortable levels especially in the context of subdued world growth.
Whilst March 2019 is the formal date when the UK will cease being part of the EU, in fact all sorts of transitional arrangements will blur the timeline.
The new minority Conservative government is dependent on the support of the DUP for its key legislation. And the DUPs main concern lies in the nature of the border with the south after the UK has withdrawn from the EU. This will drive a much softer Brexit agenda than previously.
We expect the new minority Conservative government to be a lot more durable than might be expected. The Conservative Party and the DUP have a long history of working closely together. And the key focus of all Conservative MPs will now be getting the election boundary changes through before any further election is contemplated.
Minority governments have persisted for years previously, with the minority Labour government prior to 1979 being surprisingly effective in economic terms.
So whilst the ongoing challenges of the EU negotiations will remain the focus of the media, in my view international events elsewhere still remain the greater source of downside risk. Unsustainable national debt remains a major problem within the EU, with the Greek negotiations continuing to come to head periodically.
The problems of Middle East instability have become intractable, and Trump could unintentionally prompt an adverse geopolitical event.
But my greatest source of concern still lies with the scale of aggregate non-performing loans in China, and the associated risk of a credit crunch. In this regard perhaps the outcome of the UK election has been that our principal concerns have not greatly changed, although a softer Brexit now seems more likely.