The City of London: Not out of the woods
Prospect’s Jay Elwes spoke with Richard Woolhouse, Chief Economist at the British Bankers’ Association, for a wide-ranging interview last week. We’ve pulled out his insight on ten key issues affecting the banking sector.
Read the full transcript of the interview
On the UK Recovery
“We’ve seen quite a lot of upside surprise in the last year and a half, in terms of growth, and while the sources of growth were narrowly focused on consumption and housing we are now seeing a pattern of broadening in the recovery which I think is healthy, particularly in investment which is picking up now at close to double-digit rates, year-on-year.”
On self-employment
“If you work 16 hours a week then you are defined as self-employed. Until you get data from HMRC in terms of tax returns it’s very difficult to see what income people in that group are earning. There may be a lot of people particularly at the high-end of the age range of the labour market who are self employed who aren’t maybe earning that much and are essentially under-employed but they are counted as full time.”
On real wage growth
“There are signs of skills shortages building up in certain sectors of the economy, which are concerning. But in aggregate, we are a long way away from any sort of damaging aggregate wage price dynamic. The question though is: have we come to the end of the squeeze in incomes and are we going to see some kind of real wage growth in a context in which the Bank will be comfortable? (i.e will productivity rise as well?) I think that’s what we will see [in] two or three years.”
On politicians’ attitudes to banking
“I think there is still a significant amount of political risk, as well as a misunderstood narrative. We can talk about competition in retail banking. But there’s also this question about the wholesale financial markets; people don’t understand how important they are to the UK economy. London’s location as a capital market head quarters and all the high value added professional services that go with that are vitally important. So [it is concerning] when European banks are having difficulty hiring people who have the option of working in New York or Singapore.”
On technology companies entering banking
“They already are. If you look, there are things like E-wallet on the payments side and also for international payments there is obviously Paypal. Also Google and Facebook are entering this space. They will start to encroach on elements of the payments system first, but in the medium to long term it’s a big threat to what the banks have because essentially the banking industry is entirely digitisable.
On Mark Carney’s mooted interest rate rise
“The issue is: will Carney raise interest rates once, before the election? He has been there before in Canada and I think he is saying that he will do it. The narrative from the Coalition government will be ‘rates are rising and that’s fine because the economy is pretty robust.’ You will see a very gradual move in interest rates.”
On housing
“I would not be surprised to see the Bank of England moving on housing regulatory measures designed to constrain activity in the economy before they move on interest rates.”
“It has already shifted the Funding for Lending Scheme away from supporting mortgages to just supporting businesses. Next we will see some of the stress testing around mortgages, where people will have to do affordability tests contingent upon higher rates… Problem is, we have never done this before and we have still got to ask the question of whether the Bank can take the punchbowl away while the party is still going, and whether they have a political mandate to do that.”
On the Eurozone
“I don’t think the European crisis has been solved. I think Draghi’s actions bought them time and there’s no doubt that the pendulum has swung a long way. Spanish yields trading near US yields looks silly to me. It’s interesting to note how the UK Treasury’s position on Europe has changed to ‘we will support whatever it takes to make the monetary union work.’ Everybody knows that the monetary union was incomplete when it started, that the fiscal and political structures to support it were not were not in place.
On the impact of the European Commission’s proposed banking union on the City
“We need to ensure that the development of the banking union does not undermine the single market in financial services. The City has a very important position as Europe’s capital market and the strength of that is very difficult to replicate elsewhere in Europe. We need to make sure that there is coordination between the Bank of England and the ECB. There are other institutions like the European Banking Authority which will be very important in ensuring that we don’t get moves which disadvantage London’s position relative to the Euro area and the banking union.”
On a slowdown in Chinese growth
“China was bound to slow to 5-6 per cent growth. I lived in China… and found that a little bit of knowledge about China is a very dangerous thing. The point about China is that clearly the expansion of credit in the non-bank sector over the last five years has been enormous: about 100 percentage points of GDP. Depending what you assume about that, that’s going to cost about maybe 25 per cent of GDP to sort out. But the government has the fiscal flexibility to do it and it has the tools—the levers—to mandate change in the way that it wants. So as long as they stick to the course and there is not a run on the financial system they can probably do it.”
