Objections to Pay at Diploma and the Cost of Zero Carbon

My previous blog post covered the subject of criticism by Slater Investments of many current pay schemes. That at Diploma (DPLM) is a typical example. But at their Annual General Meeting yesterday, which I unfortunately was unable to attend in person as a shareholder, there was a revolt.

The votes cast as disclosed in an RNS statement today were 20% against their new Remuneration Policy and 44% against their Remuneration Report. I voted against both of them of course personally. The board has acknowledged the concerns of shareholders and they will consult further with shareholders plus provide an update within six months.

What is wrong with their remuneration scheme? First pay is simply too high. Over £1 million last year for the CEO when profits were only £62 million and that does not include any LTIP benefits as he is recent joiner. But the CFO got £1.6 million in total. The CEOs pay scheme includes base salary, pension, short term bonus of up to 125% of base (90% achieved) and an LTIP that awards up to 250% of base salary. The Remuneration Report consists of 14 pages when Slater suggests a maximum of two would be sensible. I could go on at length of this subject but in essence the remuneration scheme at Diploma is simply unreasonable and too generous. It displays all the faults that Slater complained about.

I have previously criticised the Government’s commitment to achieving net zero carbon emissions on the grounds of cost. Well known author Bjorn Lomborg has published a good article on this subject in the New York Post. Almost no Governments making similar promises are willing to publish any real cost-benefit analysis. The only nation to have done this to date is New Zealand: the economics institute that the government asked to conduct the analysis found that going carbon neutral by 2050 will cost the country 16% of GDP. If the small nation follows through with the promise, it will cost at least US$5 trillion with negligible impact on temperatures. Just imagine what the cost will be in the UK, for a much bigger economy! See this article for more information:  https://nypost.com/2019/12/08/reality-check-drive-for-rapid-net-zero-emissions-a-guaranteed-loser/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Slater Investments Warns on Pay, and Flybe Bail-Out

Slater Investments has issued a warning to companies of their “dissatisfaction with the framework of directors’ remuneration in most public companies”. Slater Investments run a number of funds managed by Mark Slater and others with a focus on growth companies.

The letter complains about a “relentless ratcheting of terms and conditions which have meant the interests of directors and investors have grown steadily further apart”. Specifically it complains about the award of nil-cost options which they see as a one-way bet and they also don’t like the hurdles that are set which are often simply e.p.s. rather than total return.

They also don’t like the quantum of pay awards and say: “It has become customary for executive directors to receive a handsome salary, plus the same again in cash bonus and a similar amount in nil cost options – year in, year out. Is a good salary not enough to get directors out of bed in the morning and to diligently work their allotted hours? A bonus should be determined by the return received by investors”. This is a similar complaint to my own made a week ago.

They plan to vote against remuneration reports which are longer than two pages [Comment: that means most of them at present], and vote against any schemes with nil cost options and against unresponsive members of the remuneration committee. Mark Slater and his firm are to be congratulated on taking a stand on this matter. I hope other fund managers will follow his example.

To read the letter sent to companies, go here: https://tinyurl.com/wu9jh9q

The UK Government is bailing out airline Flybe. It was obviously running out of cash and was saved from administration by the Government deferring passenger duty tax payable, a possible Government loan and more cash from the owners. Is this a good thing?

Flybe operates a number of short-haul flights in the UK and the rest of Europe. Some UK airports are apparently dependent on its operations. Is it really essential to maintain these operations when roads and rail links provide alternative transport options in most cases, albeit somewhat slower perhaps? State aid to failing companies has a very poor record in the UK – the motor industry was a good example of that. One of the few good things about the EU is its tough rules on state aid. I hope that the UK will not diverge from its principles now we are departing from the EU.

Why is bailing out failing companies a bad idea?  For several reasons. First because it effectively subsidizes poor companies which then compete with profitable companies to their disadvantage. Second, it rarely works because a bad business usually remains a bad business. For example, Flybe has been perennially unprofitable and had to be rescued via a takeover in March 2019 when it was delisted. You can see the financial track record of the company on this Wikipedia page: https://en.wikipedia.org/wiki/Flybe

Airlines are one of those businesses that I avoid. They suffer from the business model problem that they are always trying to maximise passenger loading as the economics of airlines means they need to fly the planes full to make money. This means they cut prices to fill volume when business is bad, but their competitors do the same (and their competitors can be other transport modes on short-haul flights such as buses or trains).

It has been suggested that the worlds’ airlines have never overall made money since the airplane was invented. I can quite believe it.

I see no good economic reason why the Government should bail out Flybe in the way proposed. If it owns some profitable routes, other airlines will take them on. There might be merit in reviewing air passenger duty in general which is a tax on travel that does not apply to other transport modes, or perhaps in providing some specific funding to unprofitable routes as suggested in the FT if there are good arguments for doing so and with onerous conditions attached. But the principle should be “no money unless the business is restructured forthwith with some certainty that it can be made profitable”.

Otherwise the danger is “moral hazard” as Lord King mentioned when refusing to bail out Northern Rock, not that I think he was particularly wise in that case. It is suggested that it just encourages the directors of companies to believe they will be rescued regardless of their incompetence. The threat of no more assistance ensures directors take more care it is argued and provides an example to others. Banks may be rescued with cash that the Government prints to shore up their balance sheet, but putting cash into airlines is typically just used to fund operating losses.

Businesses that are subject to Government regulation are always tricky to invest in. If they are not subsidising the competitors, they are restricting competition by regulation. Which one of my US contacts was explaining to me a couple of weeks ago as one reason for the demise of PanAm.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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New Year Share Tips – Are They Worth Following?

It’s that time of year when financial magazines and newsletters analyse their past share tip performance and give their New Year tips. Are the tips worth picking up or even reviewing?

One approach you might think would be effective would be to simply back those publications who had the best historic performance. One review I picked up on Twitter (I am not sure of the original source) gives the Investors Chronicle (IC) as the winner in 2019 with a 37% return with The Independent bottom of the table. However, the performance varies from year to year – for example the IC had a negative year in both 2017 and 2018, while the Guardian had negative returns in all three of the previous years. Perhaps not many investors read the Guardian but that may be to the good.

One problem of course is that the tip writers may vary even within a publication from year to year and few put their names to the articles. In essence backing the share tips based on the “form” of the publications or the writers is not going to work. Even if the writers stay the same, and their “styles” of investment such as a focus on growth or value, what works one year might not work in another.

Another failing is that some writers rely on advice from well known fund managers who tend to “talk their own book”. So the Questor column in the Daily Telegraph, written by Richard Evans, tipped Bioventix (BVXP) as “AIM stock of the year” on Friday (10/1/2020). That was after talking to Keith Ashworth-Lord of Sanford DeLand Asset Management who has a big holding in the company. The share price rose 9% on the day this tip was published which as a holder of the stock I am quite pleased with, but I would not previously have rated it as other than a “hold” personally.

Many share tips in the national media and reputable investment newsletters will rise in price on the day the tip is issued – indeed even before you have got up for breakfast. Investors then pile in further over the next few days and if you follow that herd you are going to lose money. After a few weeks, when the company’s performance does not instantly shoot up or there is little news, the speculators lose interest and the share price falls back again.

It’s worth pointing out that it does of course depend on whether you are a long-term investor or a short-term speculator. Such share price movements may be great for speculators , most of whom I suspect lose money, but for long-term holders like me share tips can be positively dangerous. My approach is therefore as follows:

I use share tips as ideas for research. Only one in ten is worth more analysis and if I consider it worthy after that I would buy a few shares and see how the company and its share price develops. Most companies fail on the “due diligence” phase. I am not a “plunger” who bets a lot on any new holding. I am looking to find companies that I can hold for the long term and in which I wish to take an opening position. Apart from anything else, moving a lot of cash out of existing holdings to invest in new ones is often a mistake, I have learned from past experience. It’s the syndrome of looking for the pot of gold at the end of the rainbow, i.e. picking new investments you don’t know much about but which someone else thinks are a great proposition, and abandoning ones that you do know.

What are the kinds of tips that I avoid?

Firstly I hate the “recovery story” kind. These are where a company with a pretty dismal historic performance has improved analyst forecasts (which is what most tipsters focus on). For example, Investors Chronicle has Burberry (BRBY) as one of their 2020 tips. The supporting article has lots of positive comments about the changes taking place in the company and its “transformation”, but a quick look at the financials gives me doubts. Revenue in the last 3 years, which is a key metric for any retailer, was static or falling and the forecasts for the next two years are only slightly higher. Earnings per share follow a similar pattern. Even under new management, is this a growth business or a just another rather mature company in a crowded sector (revenue about £3bn) flogging expensive clothes to suckers? Is there any real innovation or growth above inflation taking place is the key question?

Another example of a recovery story is Momentum Investor tipping Marks & Spencer (MKS) based on their move into on-line groceries via the joint venture with Ocado. But the wisdom of this tip was soon disproved after the company issued a trading statement on the 9th of January with dismal figures for clothing sales. The share price is down 12% since then. Too many “skinny” fit men’s trousers was one problem as the company tried to be more fashionable so that’s just another management failure partly arising from the sclerotic supply chain at the company. Tipping shares can be a quick lesson in humility of course which is one reason why this writer does not do it. Let those who get paid for their alleged wisdom continue to do so though so we can have the occasional laugh at their folly.

Window supplier Safestyle (SFE) was tipped as a recovery story by ShareWatch but is likely to still make a small loss in 2019. Are profits really going to come back in 2020 and will investors regain confidence in the business and its management? I do not know the answer to those questions so I am unlikely to invest in it.

Secondly, I ignore sudden enthusiasm for boring companies. Another of IC’s tips was Johnson Service (JSG) which provides textile rental and cleaning services – hardly a new business and one that I doubt has barriers to entry. The company is growing, but on a forward p/e of 19 and relatively high debt, I cannot get enthusiastic.

Apart from drain-pipe trousers, something else I used to favour in the 1960s that is back in fashion is ten pin bowling. Two companies that were tipped by Momentum Investor and mentioned in Investors Chronicle – Ten Entertainment (TEG) and Hollywood Bowl (BOWL) may be worth looking at. TEG (which I hold) was also tipped by ShareWatch. These companies are changing from not just being bowling alleys but indoor family entertainment centres with other games available and good food/drink offerings. Some also stay open long after the pubs have shut. You can see why they are experiencing a revival in demand with more centres opening. The key with share tips is to follow the new trends, not the old ones.

Thirdly I ignore tips that back racy stocks already on high valuations. For example Shares Magazine tipped Hotel Chocolat (HOTC). This is a chocolate retailer that seems to have a good marketing operation and decent revenue and profits growth but on a prospective p/e of 45 it seems too expensive to me. The slightest hiccup would likely cause a sharp drop in the share price so there looks to be as much downside risk as upside possibility to me.

Lastly, I ignore tips in sectors I don’t like or businesses I do not understand – the former includes oil/gas and mine exploration, airlines and banks. Shares magazine tipped Wizz Air (WIZZ) and Lloyds Banking (LLOY) for example but they are not for me. Businesses I do not understand might include some high tech companies with good stories of future potential but no current profits.

To reiterate, share tips are useful for providing ideas for research but blindly following them is not the way to achieve superior investment performance.

Preferably share tips should confirm your views on shares you already hold – such as Bioventix, Ten Entertainment and several others I hold which have been tipped in the last couple of weeks. That may be a reason to buy more, but not in any rush.

As regards other tips like the best countries, or the best sectors, or whether to invest at all based on economic forecasts or Brexit prognostications here’s a good quotation from John Redwood in the FT this week: “The safest thing to forecast at the beginning of the 2020s is more of the same”. An economist with real wisdom for a change.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Year End Review and Xmas Greetings

Xmas card

As the final blog post before Xmas, I thought it would be useful to do a quick review of the past year. I have not yet done a detailed review of my investment portfolio performance over the year as I do that after the 31st December, but on a quick look at my net worth, I think it’s been a good year. With the bounce in the stock market after the Conservative General Election victory, most investors should be well ahead this year. The FTSE All-Share is up 13% at the time of writing, with the FTSE-250 up 25%. AIM stocks had a relatively poor year, rising only 8% but ones I hold generally jumped up at the end of the year as UK small cap stocks were suddenly seen to be relatively cheap.

The focus this year though was certainly on technology stocks – internet and software companies, both small and large which continues the recent trend. Will that continue for the coming year?  I never like to predict market or economic trends, but there was an interesting article by Megan Boxall in the Investors Chronicle this week. It pointed out how the tech sector has outperformed the US market in 2019. Is this another dot.com bubble? She suggests not as companies such as Alphabet, Amazon, Netflix, Adobe, Apple and Microsoft are all highly profitable.

But she does warn that regulators are getting twitchy about the dominance of these companies. For example Google (Alphabet) is now so dominant in web advertising that the competitors are nowhere. They have become the gorilla in the marketplace as companies are bound to want to advertise with search engines that have the most users. Could some of these companies be broken up by US regulators or attacked by the EU as is already happening? Microsoft was of course the subject of an antitrust law suit alleging a monopoly and anti-competitive practices back in 2000, but escaped from any severe penalties or break-up and the case also took years to resolve so I doubt that other tech companies are likely to be badly damaged by any such law suits. But the settlement and some mis-steps by Microsoft did enable newer companies to grow into the size they now are.

Two areas that I am positive about are fintech and biotech, although the latter seems to have had rather a flat year as valuations became too optimistic and concerns grew about drug pricing regulation. Fintech, i.e. the enabling of innovative payment and banking systems, still looks a field where a lot of growth is likely and where there are a myriad of new or early-stage companies bidding to conquer the world. There is though a great danger in following such trends and accepting the hype that is given out by promoters of such companies – a lot of them will prove unsuccessful or never develop a profitable business model, and many of the shares in the good companies are wildly over-priced.

Housebuilding companies and estate agents have jumped up on hopes that the Conservative victory will lead to a recovery in confidence by house buyers. Even ULS Technology (ULS), one of my worse investments during the year and focused on property conveyancing, has risen by 50% since the low at the start of December. Does this mark a revival in the housing market and another golden era for housebuilders? I doubt it. The Government is undoubtedly keen to ensure more houses are built but house prices and the ability of buyers to afford them are driven by many other factors. With interest rates remaining at record lows, if the economy does pick up then interest rates might also rise. Readers need to be reminded that such low real interest rates are an exceptional phenomenon in historical terms. This anomaly surely cannot continue much longer.

Bearing that in mind, I won’t be investing in bonds or gilts in the near future as interest rates can surely only go one way and when rates rise, their prices fall.

Will the Conservative election victory and associated euphoria lead to a resurgence in business confidence, in more investment and hence in the growth in the UK economy? Perhaps, but there is still the potentially tricky issue of negotiating a free trade agreement with the EU over the coming year. That will likely mean the short-term euphoria will fade, as do most Santa Claus market bounces, in the New Year. But as with all market and economic forecasts, I could be wrong. So I will continue just to buy and hold well managed companies in growth sectors. That tends to mean small to mid-cap companies rather than mega-cap companies, although I do hold some investment trusts and funds that cover the latter. The managers of such funds are often closer to the market trends and the views of other investors than any private investor can hope to be.

It just remains for me to wish you a happy Christmas and a prosperous New Year.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Ted Baker Audit Failure, SRT Marine Big Deals and Population Growth

The bad news this morning for holders of retailer Ted Baker (TED) is that the company has announced an independent review of its inventory. It says it has identified that the value of inventory held on its balance sheet has been overstated. It estimates that the figure is up to £25 million and that it relates to prior years. This looks like yet another audit failure (the auditors are KPMG).

The share price is down 10% today at the time of writing but it’s been falling for a long time so it’s now down well over 80% from its peak at the start of the year. Warnings about its stock holding are not new. This is what the Investors Chronicle had to say in October: “Ted Baker’s stock levels have been a cause for concern. Inventories have grown consistently in recent years, reaching a peak of 37 per cent of revenues at the full year”. For a clothing retailer to hold that much stock seems simply unreasonable. That report came after an unexpected half year loss. I suspect that even worse news may come out in due course.

On Friday an article by Simon Thompson in Investors Chronicle contained a puff for SRT Marine Systems (SRT). This made for interesting reading as I used to hold the stock – sold at 25p in 2012, price now 52p. I sold because of repeated lack of progress and overoptimistic forecasts of big deals in the pipeline. The CEO (he’s still there) seemed to be a perennial optimist and even analysts started to become wary. Revenue and profits jumped around from year to year (big profits in 2019 after losses in 2018) and the share price jumped around similarly. Simply not the kind of company I like to hold.

Has anything changed to cause Simon to tip the share? The basis is a big deal (a “game changing contract worth £31.8 million”) to sell AIS systems for marine surveillance in the Philippines. There are also other similar deals in the pipeline. This is what is says in the recently published Interim Report in which they also reported a major loss: “Most of our system discussions are confidential in nature and usually have a long gestation period due to the nature of a government turning a general idea into a real system with all the necessary regulations, budgets and approvals. Over the last few years, we have followed a very steep learning curve in respect of understanding the realities of the intricacies and complexities of the processes that each of these large contracts must complete prior to SRT being contracted. Whilst predicting timescales remains imperfect, this knowledge now enables us to more accurately characterise system opportunities with regards to their status within a customer’s process and better understand the real time window within which we would expect to be contracted and start implementing an SRT-MDA system. We hope this will reflect in an improving ability to provide market updates on the status of future system contract opportunities”.

Big projects also create big risks though, and soak up working capital. Will they be completed on time and within budget? Will the customers be satisfied and pay on time? I won’t be jumping in to follow Simon Thompson’s tip just yet. I’ll wait to see if the leopard can change its spots.

Another interesting article over the weekend was one by David Miles (Professor of Economics at Imperial College). It was headlined: “Why our rising population will bring with it a decreasing standard of living”. The article argues that with a rising population the country needs to invest more simply not just to maintain the capital asset stock but to cover the demands of the extra population – for housing and transport for example. But the higher the population growth, the less your ability to maintain assets per person unless you raise savings. But that means lower consumption, hence we become individually poorer.

Population growth is certainly a concern of mine, and likewise for many other people who live in the London area. What follows is a article I recently wrote on that subject for another organisation:

London Congestion – It’s Only Going to Get Worse

As anyone who has lived in London for more than a few years probably knows, the population of the metropolis has been rapidly rising. This has resulted in ever worse congestion not just on the roads but on public transport also. The roads are busier, rush hours have extended and London Underground cannot handle the numbers who wish to travel on some lines during peak hours. Even bus ridership has been declining as the service has declined in reliability and speed due to traffic jams.

The Greater London Authority (GLA) has published some projections of future population numbers for the capital and the conclusion can only be that life is going to get worse for Londoners over the next few years.

The current population is about 8.8 million but is forecast to grow to 10.4 million by 2041, i.e. an 18% increase. This increase is driven primarily by the number of births and declining death rates. The relatively high numbers of births in comparison with what one might expect is because London has a relatively youthful population. One can guess this is the case because of the high numbers of migration from overseas which results in a net positive international migration figure while domestic migration to/from the rest of the UK is a net negative, i.e. Londoners are being replaced by immigrants.

But population increase in London does not have to be so. The chart below shows you the trend over the last 100 years and as you can see London has only recently reached the last peak set in 1939. During the 1960s to 1990s the population fell. What changed? In that period there was a policy to reduce overcrowding in London and associated poor housing conditions by encouraging relocation of people and businesses to “new towns”. But when Ken Livingstone took power he adopted policies of encouraging more growth. His successors have continued with those policies and have promoted immigration, e.g. with Sadiq Khan’s “London is Open” policy.

London Population Trend

Many Londoners complain about the air pollution in the London conurbation without understanding that the growth in businesses and population have directly contributed to that problem. More people means more home and office heating, more transport (mainly by HGVs and LGVs) to supply the goods they require, more emissions from cooking, and many other sources. The Mayor thinks he can solve the air pollution issues by attacking private car use and ensuring goods vehicles have lower emissions but he is grossly mistaken in that regard. The problem is simply too many people.

Building work also contributes to more emissions substantially so home and office building does not help. But the demand for new homes does not keep pace with the population growth resulting in many complaints that people have to live in cramped apartments or cannot find anywhere suitable to live at all. Likewise new public transport capacity does not keep pace with the increased demand. There is some more capacity on the Underground but only on some lines and not much while Crossrail which might have helped has been repeatedly delayed.

The economy of London is still buoyant.  But all the disadvantages of overcrowding in London mean that Londoners are poorer in many ways. Indeed if Professor Miles is right, they will be cash poorer as well. Those who can move out by using long-distance commuting or relocating permanently thus leaving London to be occupied by young immigrants.

Any Mayor who had any sense would develop a new policy to discourage immigration, encourage birth control and encourage emigration to elsewhere in the UK or the Rest of the World. But I doubt Sadiq Khan will do so because a poorer population actually helps him to get elected. It’s a form of gerrymandering.

If Sadiq Khan wanted Londoners to live in a greener, pleasanter city with a better quality of life then he would change direction. But I fear only intervention by central Government will result in any change.

Go here for more details of the GLA projections of London’s population: https://data.london.gov.uk/dataset/projections-documentation

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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General Election and the Stock Market Impact

We finally have a possible resolution of the impasse in Parliament as a General Election is to be held on December 12th. That’s after the Speaker (not Bercow needless to say) rejected two wrecking amendments to a simple Bill authorising the election. My spirits were elated by this news because it finally means that the uncertainty over Brexit (will we or won’t we depart) may soon be resolved. That uncertainty has been damaging to UK business as their plans were put on hold, and has caused a fall in the pound as the world saw that we were in a political crisis and there was a risk of a hard Brexit. It also meant little other business was getting done in Parliament as the Government had no overall majority.

Now we have the situation that with a large Conservative lead in the opinion polls it seems likely that Boris Johnson will be returned with a Commons majority and will be able to push through his Brexit Withdrawal Bill. That Bill does seem reasonable to me in many regards, as a Brexit supporter. It avoids a “hard”, no-deal Brexit which was certainly going to have some impact on business, although not as much as some people claimed. It also seems likely that the marxist ambitions of Jeremy Corbyn and the Labour Party will be a dead letter for at least a few years.  I expected that the stock market would be lifted by this news but it has not happened. Why?

Perhaps some risks are still perceived. One is that the Brexit Party will split the right-wing vote in individual constituencies thus allowing other parties to win them. Or there could be mix of parties in the resulting Parliament with no overall majority which would put us back at square one. The key is the stance of the Brexit Party where Nigel Farage is opposed to the Withdrawal Agreement as he basically thinks it concedes too much to the EU (over fisheries, future trade, future regulatory alignment, etc). But if he wants to be certain of obtaining Brexit he has to think again and form a pact with the Conservatives. The Brexit Party has already been targeting Labour seats and that is surely a good focus for them leaving the Conservatives to target marginals and traditional Tory seats. As a relatively new Party, the Brexit Party probably does not have the resources to fight all the constituencies effectively in any case. Better to focus on a few. That way the Brexit Party could achieve some seats in Parliament for the first time and have a longer-term future with some say in Government and the future negotiations with the EU. The latter still leaves a lot to be settled under the “Political Declaration” so there is much to be decided.  Otherwise the Brexit Party surely has no future other than as sheep in the wilderness.

But all this complexity is probably lost on most investors, particularly overseas ones who dominate the UK stock market. They probably will not be convinced that the UK has returned to some sanity until a clear election result appears.

But as always I am optimistic. I am betting it will be resolved in a satisfactory way as most voters are fed up with the political gyrations and many of the worse MPs have been destroying their own reputations by repeated “about-faces”. Boris Johnson has to clean out the Augean Stables that are the Houses of Parliament.  To quote: “For the fifth labour, Eurystheus ordered Hercules to clean up King Augeas’ stables. Hercules knew this job would mean getting dirty and smelly, but sometimes even a hero has to do these things”. That’s politics in essence.

For those opposed to Brexit and still clutching at straws, the National Institute of Social Research (NIESR) has reported that they expect UK GDP to be 3.5% lower in ten years’ time under the proposed deal. But the Treasury and the Governor of the Bank of England do not agree. It depends on the terms of any free trade agreement that is negotiated with the EU. I am sceptical that there is likely to be any negative impact. Economic forecasts of just one or two years ahead are notoriously unreliable. Ten-year forecasts are simply incredible. The latter cannot take account of unexpected events and economic trends, and tend to ignore the adaptability of businesses. I suspect a more positive outlook for the country might stimulate more confidence in business and investment therein and offset any minor other impacts. In essence a Government with a good majority and a unity of purpose is the key. Perhaps readers should consider tactical voting to ensure that happens.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Population Trends and Productivity

One of the key factors that affects the wealth of the population of the UK is labour productivity. It also has a big influence on the value of UK companies in which many of my readers have a strong interest.  Only by improving productivity can we become richer in essence. But even the Government recognises that this country has a big problem at present because productivity is not improving, unlike in some of our competitors.

Some relevant information on this issue recently came to light in the pages of the FT. First the Office of National Statistics (ONS) reported that population growth is slowing due to worsening life expectancy. But it’s still expected to grow by 3 million to 69.4 million by mid-2028. It also concludes that it is migration that is driving UK population growth and as the post-war baby boomers die that impact will strengthen.

Of the UK countries, England is expected to grow population more rapidly, rising by 10.3% to 2043, and I can guess where most of that will settle – London and the South-East no doubt based on recent past trends.

Now you may have concerns about that in terms of the “liveability” of the area. It will worsen the pressure on the public transport network and congestion on the road network. It will also increase air pollution substantially as air pollution directly relates to the business and travel activity of the population and the number of homes. But a letter from Professor Nicholas Oulton in the same FT pointed out that the growth of hours worked in the UK, largely fueled by migration, has reduced our productivity growth to near zero. He says the flip side of the UK’s job miracle is the productivity disaster [unemployment is at record lows].

This is not just a debate for economists though, because Brexit will enable the UK to restrict immigration from Europe which is currently unrestrained and has led to 18% of the workforce now being foreign born. That ready supply of both skilled and unskilled labour provides a disincentive for UK companies to invest in more machinery or IT systems and explains both the poor productivity growth and lack of capital investment. We have just been creating a lot of low-paid jobs.

The recent uncertainty over Brexit has also created difficulties for many businesses who are generally horrified by yet more delays in Parliament over concluding the matter. This is becoming an even more important issue than whether it is a hard or soft Brexit. So what should the Prime Minister do now that his Bill debate timetable was voted down thus making it very difficult to achieve his desired exit on October the 31st? I suggest he needs to either agree a very short delay with the EU together with some agreement from the Labour Party and others that wrecking amendments will not proliferate – I do not consider it totally unreasonable that more time was required to debate the Brexit Biill. Or he needs to get a General Election agreed. It seems that may just be possible.

But it is important to get Brexit completed if the UK is to tackle the problem of low productivity and hence low wages driven by excessive immigration.

It is the low and poor growth in wages for most of the population that is also driving the social unrest in the country which is an issue that cannot be ignored.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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