Politicians often claim credit for the strength of the UK economy in 2011 and 2012, despite this growth largely being driven by cash paid directly to consumers over the payment protection insurance scandal, according to Tilney Bestinvest’s Gareth Lewis.
Speaking during a roundtable event today (26 July), the firm’s chief investment officer said he expects political “disaffection” to prompt policy change, as the UK starts to shift towards fiscal policy following years of “unsuccessful” monetary stimulus.
Mr Lewis pointed out there has been a lot of talk of ‘helicopter money’ – introduced when interest rates are close to zero – which he said, to a certain extent, will do the same as PPI claims.
Figures from the Financial Conduct Authority indicate banks have paid out £23bn since 2011 for mis-selling PPI, and according to FTAdviser’s parent publication the Financial Times, banks might have to dish out at least another £22bn in claims.
“If you think we haven’t had a fiscal policy experiment in the UK recently then we have,” said Mr Lewis.
“One reason the UK economy was as robust as it was in 2011 and 2012 was because more than £20bn of bank capital was injected directly into the pockets of the consumer through PPI claims, which helped sustain the UK economy.”
During these two years, the UK economy was rallying compared to other developed nations, he stated, adding UK politicians claim credit for this “economic miracle”.
Mr Lewis also said investors should now be looking at politics more closely than they had been, adding it was “quite possible” the Bank of England, European Central Bank and the Federal Reserve will come under “sustained political attack” in the next couple of years.
“The Germans are not happy with ECB policy, the right wing Republican Party is very fed up with the Federal Reserve, and I think there is a realistic chance Mark Carney and the Bank of England’s credibility will be called into question.”
Referring to the EU referendum, Mr Lewis described the economic arguments around the vote as “nonsense”, suggesting it was “relatively naïve” to assume the negotiations around the UK’s exit will be amicable.
“The exit goes to the very heart of the reasons for the existence of the EU and, unless the terms of negotiation are relatively harsh, it will only open the doors for more countries to exit.
“Actually the damage being done by the vote was possibly greater for Europe than it was for the UK,” Mr Lewis said, noting the UK might suffer a bigger short-term hit, but is likely to come out of the other side more quickly.
“The danger for the EU is this could fester within Spain, Portugal and Italy, and the problems carry on and are covered up by ECB policy.”
He said the Germans and the French should see the Brexit vote as a warning and need to address the problem, instead of introducing more “counterproductive” federalism.