Economy needs ‘£1trn investment over 10 years to achieve 3% growth rate’
The UK economy would need investment of £1trn over a decade for an annual growth rate of 3% to be achieved, according to a business lobby group.
The Capital Markets Industry Taskforce (CMIT), which represents leaders in the financial services sphere, said £100bn a year must be found to help the country catch up after trailing its peers for many years.
It urged a focus on energy, housing and venture capital, arguing the money could be unlocked from the £6trn in long-term capital within the pensions and insurance sector.
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The government has made growing the economy its top priority.
Prime Minister Sir Keir Starmer let it be known during the election campaign that he was seeking to achieve a growth rate of 2.5% – a level the economy has struggled to reach since the financial crisis of 2008.
Labour has since claimed its task has been made harder by a £22bn “black hole” in the public finances left behind by the Conservatives, forcing it to make “tough choices” ahead in the looming budget next month, expected to target those with the broadest shoulders, including wealth creators.
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Are we set for tax rises?
The report suggested that UK pensions could double their allocations to domestic and unlisted equities and still be in line with the pensions industry in other advanced markets.
It added that the government, which is reviewing the pension system’s ability to help fund corporate start-ups, should also look at incentives to investment, such as reductions in taxes on shares for retail investors.
They have faced steep criticism in the City amid efforts to bolster interest in UK stock markets which have lagged growth rates witnessed on the continent and in the United States.
The report’s lead author Nigel Wilson, the former boss of Legal & General, told the Reuters news agency: “We’ve underinvested in the UK for such a long time, there’s a massive gap between the other G7 countries and ourselves.
“We have the long-term capital in the UK, it needs to be reallocated.”
The study called for an extra £50bn annually in energy investment to help drive power security and meet net zero targets.
It sought £30bn for housing and £20bn-£30bn in venture capital.
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Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the report contained helpful suggestions to lay the foundations for expansion.
“Retail investors are enthusiastic holders of UK equities”, she wrote, “helping provide the capital for companies to expand.
“Of those equities held on HL’s platform, 80% of the trades in the last year were on the London markets. But greater efforts need to be made to encourage more people to start investing.
“As the report points out, Britain has had a strong tradition of pensions savings and direct retail investment in shares.
“This peaked with the privatisations of the 1980s and 1990s and continued through the dotcom boom of the early 2000s. But it’s shocking to see that retail share ownership levels among UK households have more than halved over the past 20 years.
“Research from HL shows that too many people are sitting on excess cash savings, which could be deployed in the economy and delivering longer term returns.”
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UK interest rates an outlier after decision to hold but Bank of England forecasts inflation rise to 2.5%
There has been no change to the UK interest rate despite the US and European central banks all moving to cut in the last week.
The Bank of England has kept the interest rate at 5% as official figures this week showed some measures of price rises grew.
It follows the first cut in more than four years.
The rate set by the Bank impacts how much lenders charge to borrow money, so it affects how expensive mortgages or credit card bills are.
But there was no consensus on the decision. One of the nine rate decision-makers voted for a cut.
There were signals of the Bank’s direction of travel from governor Andrew Bailey.
Where to next?
If the economy continues to progress in line with its expectations “we should be able to reduce rates gradually over time”, he said.
But, he said, “we need to be careful not to cut too fast or by too much”.
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Market expectations are currently for a cut at the next meeting in November followed by a further one in December.
The latest forecasts from the Bank are for inflation to rise again, reaching 2.5% by the end of the year.
How did we get here?
Interest rates were brought to a high last seen during the 2008 global financial crash in an effort to bring down spiralling inflation.
More expensive borrowing can choke economic demand and slow price rises.
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Bank of England holds interest rates
The Bank is tasked with bringing inflation down to 2%. It currently stands at 2.2%.
The US central bank, the Federal Reserve, brought interest rates down by 0.5 percentage points to 4.75% to 5% on Wednesday and the European Central Bank (ECB) reduced borrowing costs last week to 3.5%.
Unlike the UK, the US interest rate is a range to guide lenders rather than a single percentage.
Reaction
Sterling strengthened, following the news and against a weakened dollar a pound bought $1.33, the highest amount in more than two years.
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Why Bank of England is in no rush to lower interest rates – even though some think decision to wait is dangerous
Slowly does it.
That’s the overarching message to take away from the Bank of England‘s latest monetary policy decision. Unlike the Federal Reserve, the US central bank, which decided yesterday to cut interest rates by half a percentage point – more than many had expected – the Bank wanted to signal today that it’s in no rush.
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Alongside the decision to leave borrowing costs on hold at 5%, the Bank’s governor also signalled that he and the rest of the Monetary Policy Committee were in no rush to cut them again. Provided there aren’t any inflation surprises, he said, “we should be able to reduce rates gradually over time”. He added: “But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
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The Bank of England has held the base interest rate at 5%
Even so, the Bank is expected to carry on cutting rates in the coming months. Indeed, economists think the Bank will cut rates in November by at least a quarter percentage point, followed by more cuts next year, taking borrowing costs down towards 3% by next summer.
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That’s largely because inflation is now considerably lower than in recent years, and because there is evidence that high interest rates are starting to weigh down economic activity. The longer those rates stay high, the bigger the depressive impact they have on the UK.
But that raises another issue. For some economists, the Bank of England’s gradualist approach is dangerous. They worry that higher rates, which deter companies and individuals from spending and investing, are causing unnecessary damage.
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That helps explain why one of the MPC members, Swati Dhingra, voted to reduce rates at this meeting.
But the rest of the committee was of one mind – no point in rushing.
Whether they are right is something we’ll find out in the coming months.
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