Why Britain’s Economy Has Been Stuck For 20 Years

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1:21When I got a new car, I thought my insurance premium would increase and empty my bank account. Like if Fetween won the lottery. I've invested most of my winnings in chicken tenders because they're bomb. But bro, I bought a house and it's sick, bro. I'm thinking the floor is going to be all trampoline, bro. With the helipad on the roof. The contractor said it's structurally unsound. They're just being babies. But switching to Geico saved me hundreds, so my bank account is safe. It feels good to save some hard-earned cash. It feels good to Geico.

1:55Money market's massive. If money is evil, then that building is hell. The show goes on! The folks in there are watching show, show! Welcome to Prof G Markets. I'm Ed Elson. It is June 23rd. Let's check in on yesterday's market vitals. The S &P 500 and the Nasdaq fell as tech giants declined. Google shares fell 5 % after two top AI researchers left the company for rivals. Meanwhile, SpaceX stock dropped 16 % for its third straight day of losses, dropping to its lowest price since its IPO day. Meanwhile, the Dow rose on hopes for negotiations with Iran. The Russell 2000 closed above 3 ,000 for the first time ever.

2:40Oil fell and finally, treasury yields climbed. OK, what else is happening? The UK is about to get a new prime minister. Keir Starmer announced he will step down after losing the confidence of his own party. Andy Burnham, former mayor of Manchester, has emerged as his most likely successor and could assume the post by mid-July. Prime Minister Starmer's resignation comes almost 10 years after Britain's vote to leave the EU. A decade on, the promise of faster growth has yet to materialise, and the UK economy continues to struggle with sluggish productivity and a cost of living crisis. So what exactly went wrong for the UK economy?

3:23And how is it that the country is on its seventh prime minister in the span of 10 years? Well, joining us to discuss this, we're speaking with Paul Johnson, economist and provost of the Queen's College at Oxford. Paul, thank you so much for joining us on Prof G Markets. Just to refresh our memories here, it was roughly two years ago that Keir Starmer, the leader of the Labour Party, won this election to become prime minister, and he won in a landslide against, of course, the backdrop of many, many years of conservative leadership. And now he's stepping down. It feels like almost yesterday that we talked about him getting the position.

4:04So I guess the first question that I'd love to know the answer to, what has gone wrong? The Labour Party won an enormous majority, having been out of office for 14 years and actually in 2019 looking like they might be out of office for another 14 years so it was an amazing turnaround it was a big big victory a couple of years ago but the prime minister lost um kirsten lost popularity very quickly partly because the manifesto on which he ran didn't really reflect the decisions he was going to take as soon as he got into office so he started doing what some of us would argue were quite sensible things like like small reductions in some of the benefits that pensioners, people in the state pension age, received.

4:49There's some very big tax rises that were introduced, despite the fact his manifesto said that he wouldn't introduce big tax rises. And then there have been a series of missteps around personnel. Peter Mandelson turned out to have unhealthily close connections with Jeffrey Epstein. There have been a series of other issues with the Prime Minister's judgment, but he's become incredibly unpopular, probably more unpopular than it's easy to explain. He's a decent, hardworking, honorable man, but has really failed to connect with the electorate. Just looking at previous prime ministers, I mean, we saw that when Rishi Sunak was coming to the end of his time, he was pretty unpopular too, or at least the Conservative Party was very unpopular.

5:36You had Liz Truss, which was obviously something as close to a disaster as you could get. At least I think that is sort of how she is remembered at this point. You had a lot of resentment towards Boris Johnson, especially coming out of COVID and all of his antics there. I mean, when I look at the UK, and I live in the US now and I have done for some time, it seems as though every single leader is botching it in some way. and I start to wonder if this is because these leaders are actually unqualified or not doing the right job or if it's something more systemic and coming off of the 10-year anniversary of Brexit, I wonder if these issues that are ailing the country maybe can't be solved in just one term from a prime minister.

6:25You're right. I mean, it's been a combination of the two, I think. We've not had the world's greatest leaders, I think it would be fair to say, over the last 10 years, But they've also inherited a really, really difficult situation. The first couple trips up over Brexit and how to actually achieve that. Then we had absolute chaos, as you say, with Liz Truss. Part of the problem here is that between elections, the leaders of the prime ministers are effectively elected by a very small number of people in their own political party. and we got a slightly strange outcome, I think it's fair to say, with Liz Trust.

7:05But I think the overall story here is Prime Ministers are unpopular because people are not feeling well off. We've had now actually nearly two decades of really, really poor economic growth. Average earnings today are pretty much the same as they were 20 years ago. Now, that is really unparalleled in British history for probably 200 years. And that's why people now talk about a cost of living crisis. Inflation in the UK has been higher than it's been in most other developed economies for quite a long time. And the result is essentially the electorate is really pretty fed up. Now, with a fed up electorate, we're getting fairly chaotic politics.

7:47but of course chaotic politics makes it difficult to produce the stable policies and the growth that might get you out of that spiral so you get you get a fed up electorate you get chaotic politics you get less growth and you get an even more fed up electorate and i think that's the horrible spiral we're in at the moment what would you say are the biggest problems ailing the uk's economy at this point in one sense it's it is that lack of growth we've had very little in the way of productivity growth for a very long time. Now, the question is why that? Well, partly, we were particularly badly affected by the financial crisis, but a very big financial sector, particularly in London.

8:29Partly Brexit and the uncertainty that happened after 2016, there's a general acceptance of that, cut a few percentage points off growth. But I think a combination of that with some pretty poor policy choices. We've got a very difficult planning system. It's very hard to build stuff here. There are certainly elements of our education system that could be better. We've got an incredibly complicated tax system, which is definitely creating problems for growth. I mean, it's worth saying, many European countries are struggling. We're just struggling more than most of the rest. Just looking ahead, it appears that the next prime minister if he isn't challenged will be Andy Burnham.

9:15Odds of him being appointed as Prime Minister before July 18th are up to 55 % on Cal Street and up to 84 % before August. What do we know about this guy Andy Burnham and what are perhaps his plans or what might he try to do in order to get the country out of what appears to be something of an economic mess? The straightforward answer as we don't know. And it's quite remarkable that it looks like, I mean, he's almost definitely going to become prime minister very quickly because Labour politicians are, essentially it looks like they're all going to back him. But they're backing him off the back of a sort of a general sense, I think, that he's a better politician than Keir Starmer and a general sense that he might be a little bit more left-wing because the Labour Party is probably a little bit to the left of what Keir Starmer has been doing.

10:10What he would actually do, he said very little. I mean, there's a bit of a joke, to be honest, over here, which is that he's changed his views a lot over the last 30 years. He's been in politics for a long time, and he's sort of moved from sort of the Blairite sort of new Labour, sort of quite moderate Labour of the 2000s. He went quite a long way left in the 2010s. He's painted himself a picture as an independent mayor up in Manchester. He calls it a form of business-friendly socialism. How that is likely to play out on the national stage, we don't know. He's toyed with greater public control of some industries, but we don't know what that means.

10:59It's highly unlikely to be full-scale. nationalization. He's gone back and forwards on what he thinks he might want to do to higher levels of taxes and so on, and also back and forwards a bit on whether he's going to borrow more. So the only honest answer I can give you is I don't know what his economic policy is going to be, except that I think his instincts are somewhere to the left of the current government. Is there any consensus at this point on what the policy should be going forward? I mean, you mentioned that he is more left-leaning. Maybe that would mean more government spending, although we know that the debt levels in the UK have gone kind of crazy in recent years.

11:41Or maybe there's a shift in the other direction. I mean, what is the economic path ahead for the UK? Does anyone agree? It depends on consensus among whom. I think there's a little bit of a consensus among technocrats. But we technocrats tend to have solutions that politicians find rather difficult to implement. So tax reform is quite difficult when your people aren't getting better off, because that will mean some people are left worse off by reforming the tax system. Making it much easier to build things is quite unpopular with people who live near the places that the roads or how you are going to get built.

12:22Spending more on investment, if that means spending less on welfare, for example, is also unpopular in the short term. So I think among technocrats, there are some pretty well-worn ideas about what you need to get growth. But politicians for a long time have shied away from doing those things because they appear to be electorally unpopular. All right. Paul Johnson is an economist and provost of the Queen's College at Oxford. Paul, we really appreciate your time. Thank you. Thank you.

12:56After the break, the Strait of Hormuz remains under pressure. And for even more markets insights, you can subscribe to my weekly newsletter, Simply Put, at simplyput.profgmedia.com.

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15:43When I got a new car, I thought my insurance premium would increase and empty my bank account. Like if Fatween won the lottery. I've invested most of my winnings in chicken tenders because they're bomb. But bro, I bought a house and it's sick, bro. I'm thinking the floor is going to be all trampoline, bro. With the helipad on the roof. The contractor said it's structurally unsound. They're just being babies. But switching to Geico saved me hundreds, so my bank account is safe. It feels good to save some hard-earned cash. It feels good to Geico.

16:20We're back with ProfG Markets. It's now been six days since the US and Iran signed a memorandum of understanding to end the war, but not much has changed. Traffic in the strait is stalled and oil still hasn't left Iran. Representatives from both countries met in Switzerland yesterday to discuss a few key issues. Those included a ceasefire between Israel and Lebanon and ship traffic through the strait of Hormuz. In the meantime, the U.S. Treasury Department granted Iran a 60-day license to sell oil in U.S. dollars for the first time in over a decade. In exchange, J.D. Vance says Iran has agreed to allow U.N.

17:02nuclear inspectors back into the country. Despite these talks, investors still have a lot of questions that are yet to be answered, namely, when will the strait truly be open to tell us how the market really views this deal. We're speaking with Brian Kurzmak, Portfolio Manager at GQG Partners. So Brian, thanks for joining us on the show. The US and Iran signed this memorandum of understanding last week. We all kind of thought maybe the war is over at this point. Maybe the Strait of Hamuz will open. And then over the weekend, Iran says the Strait is actually closed. And the US doesn't really acknowledge that.

17:42Then there's some confusion. Now I guess it's open again, but not really. I mean, from your seat, what is the status on the Strait of Hormuz? Can we say it's open or closed? We were actually fairly constructive on energy even before any of this started. And one of our thoughts were that, you know, we came into this year expecting that there would be a little bit of a supply glut in energy, crude oil specifically. It was our view that a lot of the consolidated base of the energy companies globally, especially the swing producers in the US were actually slowing things down in terms of you saw rig counts coming down.

18:14You saw people sort of adjusting for that oversupply that was supposed to happen this year into next year. And you had some really high quality operators that are going to put up extremely strong earnings, even at a$60 a barrel sort of price tag. What you can definitively say is even if the straight magically open tomorrow, and we did get everything logistically firing back on all cylinders, so to speak, you're seeing a situation where it's probably an$80 plus environment, but glut is gone. So even now, when you kind of look back at the companies that you're talking about, like an Exxon, for example, that even at the price of oil stays at$65 a barrel, they're going to be able to do almost 20 % total return, 13 % in terms of EPS growth or in terms of a K-Gro over the next couple of years.

18:59That looks really attractive either way. To get to your question more directly, though, in terms of the straight being open or not, I think one of the things that we have seen come out of this is that Iran can talk about the closure of the straight. and there's almost this asymmetric impact of having that information because just the talk about closing the straight back down sends insurance prices through the roof. It talks about the shipping slowing down and folks not necessarily wanting to send freighters back into the straight regardless of how many you're getting out at this point in time.

19:32So there's a lot of logistical challenges and I think ostensibly you could talk about supply being constrained for a bit longer than what we're sort of expecting with the market is priced in. Yeah, the insurance point is an interesting one. And this to me is something that, I mean, markets appear to have been relatively optimistic about this entire situation. But it seems as though there is now increased uncertainty, whether or not the strait is open or closed, that it might be closed in the future, or that it might be closed tomorrow or the next week, or that there might be a missile that is fired at a vessel nearby.

20:10I mean, the level of risk and the level of confusion and uncertainty around the strait seems to me to be now more elevated, which would make me think that the floor on the price of oil has just fundamentally been raised. I'd be interested to hear if that is your view. And if so, what does that mean for asset prices beyond oil? What does that mean potentially for inflation in the US? and how could that affect the markets at large? Yeah, what I think is the case at this point is that you probably do have a higher floor. So number one, you took out that supply glut that we were talking about and then the price of that oil permanently, you know, should be a little bit higher.

20:50There should be some level of risk premium, so to speak, that you have to sort of compensate for for getting that oil out of the Persian Gulf. A lot of the energy companies, for example, that we talk to when they go to contract ships, they're not necessarily sending ships in. Anytime soon, they're going to wait several months to wait to see if there's more clarity in terms of that. uh maresk themselves uh you know talked about not necessarily changing their plans and sending ships back in so there's a delay there is a lag and i think it'll be a long time before there is a true return to normalcy so then the next question is well why is oil sitting at the price that it is right now i think that's a really interesting one because with everything that's going on you would expect you're taking almost a fifth of the world's energy out of capacity so to speak and locked in the strait that energy prices should be substantially higher yet here we are sitting in the 70s, almost$80 a barrel in terms of energy.

21:39And what I think you're seeing is two things. Number one, you've offset a decent amount of that supply or that lack of supply through inventory draw. And it's been well publicized, but what's interesting is even last week, we had a 17 million barrel draw off of both US inventories and the SPR. So you're getting sort of subsidized barrels, so to speak, that are working their way through the system. I was on top of, I believe it was 16 million barrels the week before, maybe 15 the week before that. So you're seeing this consistently coming through this level in magnitude that's offsetting whatever you would have gotten out of the straight in that sense.

22:14You've also seen China tap the brakes a little bit. They have massive oil reserves on their side, so they've slowed down on their imports and they've drawn down their own finished products inventory. So I think that's causing that price to be a little bit lower. That combined with the fact that the shipping costs of going out there and sending this stuff through is so expensive that everybody's just kind of sitting on their hands. They're saying, okay, everybody keeps telling me this thing is going to be over in the next six weeks, next eight weeks, another month or two. So I'm going to wait for the price to be a little bit lower so I can go and refill those inventories.

22:46And I'm just going to wait and draw them down in the meantime. It's kind of like that transitory argument and or the variable mortgage rate argument that people used to have in the day where I'm going to take the mortgage at the lower price now, even though it's variable, because I believe the rate's going to go down later. Well, that works unless it happens. So what if the straight actually is prolonged in terms of being closed or being constrained, then you have to start buying these barrels at a higher price. And that's when you start seeing the physical prices coming back up when that inventory sort of hits those bottoms.

23:17And I think that thing that concerns us a little bit is when you start looking at those data, Cushing, For example, Cushing, Oklahoma, you're at essentially effective tank bottoms there. You're about 20 million barrels. You get any lower, you start getting rust and like the sludge and stuff in the bottom of the barrel coming through. So it's not really that usable below that level. I think about U.S. gasoline inventories. I think we're at 214 million barrels right now. From what we've heard and seen, that's about 195 to 215 that you start hitting that operational minimum, meaning that you get any less fuel in the tanks.

23:48then you start having those gas pumps with the plastic over them. And any sort of disruption causes that to happen. So we're at pretty low levels right now. And Trump even said this, he said, we'd be out of energy, be in a really bad situation in the next four weeks if things didn't clarify themselves. So I think that's why you're seeing the negotiations as hard as you're seeing happening and the concessions that are being made happening within the Iranian situation. Yeah. In other words, the price that we're seeing, which is to be clear, elevated, but not as elevated as you might think, is largely because there are expectations among investors that soon enough, they'll come down.

24:24So why would I pay a high price right now? Because the expectation is that this will be over, which is optimistic. That's a level of expectation, that's a level of optimism that may or may not lost depending on what happens in these negotiations over the next few weeks. Just, I mean, to play this out, let's say the optimism fades. Let's say people decide, you know what, we haven't made real progress on this deal. We keep on hearing about a deal. This one was supposed to be like the real one. And then if for whatever reason, it turns out to not be the real one, I think you can make an argument that it isn't.

25:00But if for whatever reason that happens, then suddenly we're dealing with another issue where the price could go up even higher. I'd be curious to get your views on inflation and as a result, interest rates, because this seems to be the thing that most investors are divided on. Will interest rates rise within the year or will they not? It seems to be a coin flip at this point. Yeah, so I think one of the things that you see already in terms of the higher fuel input costs, energy costs that we've seen up until this point is it is starting to have an impact on things. Now, it may be somewhat muted because we've only gone through one earnings cycle and you only had a partial impact of this stuff up until this point.

25:42But you look at some of the retailers that have come out, the Walmarts, the Costcos, even the dollar stores and things like that. They've all talked about the fact that consumers are facing sharper pricing and they're having to try to absorb some of that pricing on their behalf. Now, they particularly get a benefit because consumers trade down to, quote unquote, inferior goods. They're going away from the more expensive place to shop and going there instead. So that's helping them. But in the grand scheme of things, that is sort of hurting that purchasing power, so to speak. You hear this with some of the industrial players.