Yes, the wall of worries about the UK’s current economic outlook is tall, with many bricks, but it’s not insurmountable.
That’s the key message from Kevin Gardiner, Global Investment Strategist at Rothschild & Co, speaking to a room of private client professionals at Spear’s 500 Live on 28 June at the Savoy.
Gathering to have conversations and make connections, attendees – from wealth management and private banking to philanthropy, luxury, law, property and beyond – listened to the eminent economist discuss the worries and impact on their clients.
These include stressed banks, sticky inflation, the prospect of a recession and geopolitical risk. While acknowledging that these dynamics do indeed exist, Gardiner is perhaps more optimistic than expected.
‘Since last autumn, the wall of worry has felt particularly big,’ he said. ‘But we will climb it, we will get through this, and that’s the thing to focus on, rather than the individual components in the wall.’
UK economic outlook: tuning out the noise
Gardiner stressed that a ‘false narrative’ is at the core of the ‘overly negative’ outlook: ‘If you only see the economy through the lens of the public debate about it, if you only look at the economy through the lens of the media, you’re going to misinterpret what’s going on.’
Not only is this ‘misguided outlook’ a consequence of the news media’s coverage, he argues, it’s also a result of the economic establishment’s one-sided view of balance sheets and a fixation on spending.
Yet we can’t push all the blame, Gardiner added; there needs to be some individual accountability.
‘Because we worry more about losses than gains, because the human experience is very rigidly bounded at one side of the probability distribution – nobody lives forever – we’re aware about what can go wrong.
‘And we always want to be told that the future is particularly precarious and that things have never been as especially difficult as they are at the moment.’
Gardiner emphasised that many of the ‘bricks’ in the wall of worries are nothing new – we’ve dealt with them before, we’ll deal with them again.
Kevin Gardiner’s views on:
Geopolitics
‘For me, it’s not Russia and Ukraine, as awful as that situation is; it’s the situation in China. China will never relinquish its claim on Taiwan. Western politicians often seem to not understand the nature of that claim, but that claim will be there indefinitely, though it might not be actioned imminently.’
Bank stress
Each cycle, banks seem to find new ways to lose money; but are they at a level that we saw in 2008? We think not… To the extent that we can track bank capital, there seems to be more of it. To the extent that we can track bank assets, they don’t seem to be as indulgent, or they don’t seem to be chasing as risky returns as they were back in the noughties.’
Potential recession
‘We’ve been around this course many times before. We know where inflation comes from, and we can gauge when it’s a manageable problem. For me, it’s currently a manageable problem… Whether there is or isn’t a technical recession is missing the point. What is important is whether we see a significant economic downturn, or something which is relatively short-lived and mild. And there is no reason, as I see it, why we should be facing a significant economic downturn.’
Interest rates
‘Interest rates are not going to come rattling down any time soon. History will not be kind to central banks recently; they’ve managed to almost capsize a boat in a calm sea… Going forward, central banks have a big credibility gap to close, so they’re probably not going to allow interest rates to come down in a hurry.’
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For Gardiner, it’s all about perspective. It’s understandable to worry, and many of these worries have foundations in truth. But the key is ensuring that they don’t ‘take on an overwhelming appearance that they don’t necessarily have.
‘The investment conclusion for us this year so far is not to sell, but look for opportunities to buy… We need to be in long-term growth markets rather than saying, ‘the future looks grim; it’s insurmountable’, and sitting on our hands.’
Held at The Savoy in central London, Spear’s 500 Live 2023 was sponsored by Archax, the Charities Aid Foundation, HCA Healthcare UK, Henley & Partners, St. James’s Place Private Clients, and Unica Capital.
