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EY ITEM CLUB POINTS TO GROWTH PLUS SNP RANSOMS UK DEFENCE By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

eyitem20 Apr 15. Despite political uncertainty caused by the thought that the UK might be led by a minority government, one that might well end up in coalition with Labour, it seems that low inflation, high employment plus the likelihood of stronger Eurozone growth will still allow the UK economy to expand by 2.8% this year.

Such views come from the independent EY Item Club, a much respected UK based economic forecasting group and one that makes very sensible use of the UK economy the financial model used by HM Treasury. As precise as it possibly could be and one that, apart from worries over the planned EU referendum, are views that I mostly agree this EY Item Club report will be particularly welcomed by the outgoing Coalition Government as being absolute vindication of the very hard work that has been doing to turn the economy round whilst at the same time attempting to reduce the government deficit.

Quite rightly the EU Item Club report highlights that together with inflation and interest rates being low and with employment in the UK now being high and still growing that the UK might also begin to benefit from the potential improvement in the Eurozone economy. It reasons this partly on the back of the ECB having now started the EUR 1.1trillion financial stimulus asset purchase plan, one that is being conducted along similar lines to the now reduced Quantitative Easing policy the Bank of England operated for the past few years and that is now believed to be improving the outlook for Eurozone area growth. The importance of this being that Eurozone happens to be Britain’s largest trading area.

I suppose that if you flood the system with new money there is almost bound to be a positive follow through in terms of raised economic activity. This has certainly been the case in the UK but when we look deeper into this perspective within the Eurozone area I think that we need to keep in mind that turning a single economy around such as the UK is somewhat easier to do than turning around nineteen diametrically opposed nations that happen to share one single currency and that have different political ideas and values let alone economies at different states of maturity.

On top of all this there remains the not so small unresolved matter of Greece to overcome and that could yet undo all the good that the ECB might be trying to do by printing new money to buy back assets and I would also that uncertainty over longer term UK membership retention as a member of the EU is hardly a help to the prospects of UK growth.

For all that it is certainly true to suggest that in terms of low valuation against a basket of currencies the Euro area is now in an excellent position to step up exports. The Euro is today still hovering close to a 12 year low against the dollar and it is pretty close to an eight year low against sterling as well. That is to the advantage of Brussels even if we in the UK also have to recognise that it can be to our disadvantage as well. And thereby hangs the rub of the problem for us – yes, an improvement in the Euro economy would certainly be welcome but in small part it may also be at our own expense.

Back on the UK economy and an area of long standing concern for me that is rather ignored by the EY Item Club is the fact that the majority of the 2.8% growth we are talking about here is consumption based as opposed to export led. In my view it is high time that we stopped kidding ourselves that so long as the economy is growing all is well. Of course consumption driven my greater confidence in the economy and in jobs by individual consumers is hugely important and really does matter. But so too should be that that it is just no good an economy growing if the consumption is being fuelled by greater imports as opposed to making more of what we consume here at home and also exporting more too.

All that said, there is little that I can find to disagree with in the EY Item Club report even if what it has come out with is not all about good news. For example, that the economy is, according to long time EY Item Club chief economic advisor Peter Spencer, seemingly taking all the various scenarios of the general election outcome in its stride is surprising. Markets appear to be doing that as well although here with over 60% of FTSE100 constituents being heavily biased to international revenue and profits as opposed to these emanating from the UK makes such a situation less surprising. But why I wonder are bond markets showing little concern about the prospect of a hung parliament and one that might not be quite so workable as the one that has just gone?

On a day that Prime Minister David Cameron has chosen to talk about finding better ways to ensure that in parliamentary terms the English do not lose out to a strengthened devolved powers that are to be given to Holyrood how sad it is to see the most powerful politician in Scotland and yet one who will not be around in Westminster seeking to further damage UK defence. How can it be that one woman who is not even contesting a seat in Westminster could, if the SNP goes into bed with Labour, be allowed to hold so much sway over defence policy? It is not just Trident that concerns me, it is also conventional defence that SNP leader, Nicola Sturgeon is likely to damage.

As many of you know from previous writings from me, I view the absolute necessity of Trident replacement as sacrosanct. The possession of deterrent capability in the form of Trident is crucial to our ability to stand any would-be aggressor or enemy in the face. Just as Polaris had done and the ‘V’ bomber force before that the possession of such weapons has helped to ensure that we have for the past seventy years lived in peace and harmony. Nicola Sturgeon would have us give this up to fund more for health, welfare and whatever. Today we might also hear more as to how the SNP has, according to the Times, threatened to hold Britain’s security to ransom by trying to block the military budget until the renewal of Trident is halted.

Nicola Surgeon is not only a menace she is a danger to our whole society. With no right to having any voice in Westminster as she is not even standing for a seat I note that yesterday she had the gall to claim that the SNP would hold more power than ever before it if was propping up the Labour Party [as a minority government] at the very same time that her deputy was letting it be known that they were looking at ways of scuppering parliamentary authorisation of the annual MOD budget. The only way to stop this challenge to the authority of the United Kingdom by this latest in a long line of Scottish ‘pretenders’ is to ensure that you do not vote Labour.

To be fair I know that the Labour Party is as embarrassed at the prospect of damage that Nicola Sturgeon can and probably would do if the SNP routs Labour in all of its Scottish seats. The Labour leadership must rise to the challenge and make an absolute commitment to the British public that it will not work with the SNP in any form.

Of course, I distrust Labour party policy on defence know full well that Ed Miliband seeks to push defence further down the agenda. I regret that just as I do the lack of commitment from Labour and Tory party alike during the election campaign to meeting the 2% of GDP that was agreed last September that all Nato members would work toward spending on defence. No one it seems from any of the political parties can be trusted to ensure that the UK will maintain sufficient levels of defence capability in future. No so much a case of “will the last person to leave England please turn out the lights” but will there be any lights left to turn out in a year or two’s time?

CHW (London – 20th April 2015)

Howard Wheeldon FRAeS


Tel: 07710 779785






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