We are closer to the next downturn than the last, says top bank economist

Head of of economics for HSBC Mark Berrisford Smith stunned delegates to the ACE International Conference on Wednesday when he warned that in terms of economic cycles 2017/8 is scheduled to be tough and business will have to “take it on the chin”.

Jackie Whitelaw
22 May 2015

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Berrisford Smith’s message was that close to seven years after the failure of Lehmann Brothers in 2008 which heralded the worst recession since the 1930s, the global economy is still not doing terribly well.

“Britain is doing all right, the US is doing all right and there are a long list of others managing likewise but it is by no means everyone,” he said.

"The world is not investing enough to drive productivity growth. If you don’t put it in, invest in infrastructure, processes, people, you wont get the productivity out.”

“It is taking so long to get the global economy going we are certainly nearer the next downturn than we are to the last.

“Economies work in eight to nine year cycles. So the next downturn is scheduled for 2017, 18 or19. We have got two to three years to get it right.”

But that will be difficult, he explained.

Governments won’t have the ammunition to fight a downturn in the traditional way – with fiscal support. “(After the last recession) they don’t have the money and interest rates are still close to zero.”

He told the audience of 150 business leaders that “when the next one comes you are going to have to take it on the chin and roll with it”.

Berrisford Smith explained that the global economy is struggling because the big engine of growth – trade liberalisation – has gone. The world is trying to kick start it by focusing on regional trade agreements but deals such as one for 11 countries in the Pacific are struggling to close out. “And as for the Trans Atlantic Trade and Investment Partnership between the US and the EU, if negotiations yield anything by 2020 I’ll be surprised.”

The world is not investing enough to drive productivity growth, he said. “If you don’t put it in, invest in infrastructure, processes, people, you wont get the productivity out.”

He had a stark vision for businesses operating in economies that sink into deflation.  “The easiest way to pay your debts is a nice dose of inflation. But deflation does the opposite. Your turnover falls from £50M to £48M and that looks bad but you are just doing the same as before but it’s prices that are falling. Profits fall too. But debts don’t fall and become more and more onerous to service until you gradually sink into a sea of your own debt.

“But,” he said “deflation is not going to come to Britain.

“We are working close to full capacity. However it is an issue in some parts of Europe, Scandinavia and Japan. If you have an economy not working at full tilt it is always a risk.”

Berrisford Smith suggested companies prepared for interest rate rises.  The US economy is now bigger than it was pre-recession and along with the UK is delivering 2-3% growth.

“What is important is that the US is creating jobs, and is close to reaching its full potential. The global economy got off to weak start this year and US might even have shrunk but that is a temporary blip. The housing stats are roaring back and they are still creating jobs.

“We are getting close to when US starts raising interest rates. It could be September, it could be October.

For the UK he predicted interest rates would be at 2% by the end of next year.