You’ve got to hand it to Scott Bessent – what a way to announce a foreign-exchange intervention. For those who missed it, the US Treasury Secretary did so via a carefully placed to-do list – of one – at a cabinet meeting.
‘Buy Japanese yen (JPY) $5–10 bil’ it read. And then they did.
In the grand scheme of things, it wasn’t much. $10 billion pales into insignificance against the nearly $10 trillion traded on global foreign exchange markets every day. But the signal mattered rather more than the money. Why, markets have been left wondering, was the US Treasury sufficiently worried about yen weakness to intervene at all? With bond markets already looking distinctly twitchy and questions mounting over whether the latest AI-fuelled boom has rather got ahead of itself, perhaps there are dark clouds gathering over the global economy.
But before I forget, apologies to my regular three readers who were waiting for my recommended summer reading list before I disappeared on my annual sojourn to the hills outside Rome. I was apparently so eager to say ‘I told you so’ after the conveniently timed (i.e just after the scheduled GST debate) publication of the Guernsey Household Expenditure Survey underlined our rather fundamental lack-of-growth problem that I forgot to provide it.
Well, breathe out and relax. Unlike last year, when my holiday reading provided material I subsequently inflicted upon you for months afterwards, this year’s selection was something of a disaster. I took five books away and finished none. The End Of Enlightenment, by Richard Whatmore, actually does come recommended – I simply got to it last and ran out of holiday. The others I tried and failed to finish. I don’t like giving up on books. I find it intellectually lazy. Even when you disagree with an author, you normally learn something, even if it is only why you disagree. Unfortunately, my deliberate strategy this year of choosing authors I expected to disagree with backfired spectacularly.
The principal culprit was Cahal Moran’s Why We’re Getting Poorer. I had genuinely high hopes for it. I’ve become slightly fixated on the growth question, and not simply because Guernsey’s lack of it provides convenient cannon fodder for the occasional self-satisfied GP column. What I had been expecting was the outline of a conceptual framework – a world view, a theoretical exposition of what has gone wrong in developed economies and why growth has slowed so markedly. One that I could mentally critique and challenge. It’s what I do for downtime.
I had bought a book called Why We’re Getting Poorer because I wanted an explanation of why we’re getting poorer. What I got instead was largely a left-wing diatribe against the usual suspects. The first half proceeded through a succession of familiar complaints: a paint-by-numbers pastiche of some of Will Hutton’s economic arguments from 30 years ago; a tired attack on billionaires; a chunter about declining social mobility; and a laughably thin diagnosis of the housing market which managed, inevitably perhaps, to arrive at rent controls as part of the cure.
I should perhaps have known better. ‘Economics for an unfair world’ runs the rather juvenile subtitle. None of those subjects is unimportant. Nor does disagreeing with someone’s politics make their economics wrong, though I found myself struggling to agree with much of it. I persevered until the section on money, at which point, as someone who once spent an unhealthy proportion of his life studying monetary economics, I decided I had suffered enough and gave up.
But it still left me pondering the question, rather inconveniently, in the hills outside Rome – where does economic growth actually come from? I kid ye not.
Italy provides a clue. Its post-war miracolo economico transformed a relatively poor agricultural country into one of the world’s great industrial economies. Much of that was catch-up growth: adopting existing technologies and moving workers from relatively unproductive agriculture into vastly more productive industry. But you can only move the same worker from the fields into the Fiat factory once.
Those unfortunate enough to have studied economics may remember the production possibility frontier – usually a bowed line on a blackboard accompanied by an implausible economy producing only guns and butter. Strip away the undergraduate economics and the idea is wonderfully simple – given the people, capital and technology you’ve got, there is a limit to what you can produce. Long-run growth ultimately means pushing that limit out (finding better ways of doing things – in other words, productivity growth).
But here’s the less cheerful bit. You can go the other way too. If producing the same amount of useful output requires ever more cost, administration and people engaged in processes which don’t themselves add to that output, you end up using more of your resources simply to stand still. Not so much pushing out the frontier as making it progressively harder to reach.
Which brings me back to Guernsey.
The global offshore financial services industry that powered much of our extraordinary rise in living standards is now a more mature and fiercely contested market. The tailwinds simply aren’t what they once were. Finance is far from finished, but the offshore variant – certainly the part within Brussels’ regulatory reach – has had a very tough 15 years. Back in the mid-noughties, our funds and fiduciary sectors were growing at around 15% a year. At that sort of rate, frankly, you can get quite a lot wrong and still look clever. We are not operating in that world anymore.
Since that time, I think we have allowed too many of the fundamentals of Guernsey’s competitiveness to deteriorate. Housing matters because eventually its cost turns up in wages. Energy matters. The general cost of living matters. Government costs and charges matter. And regulatory costs, both hard and soft, matter – not because regulation is inherently bad (although it can certainly be done badly), but because somebody, somewhere, has to pay for them.
And these costs compound one another. If living here becomes more expensive, wages eventually have to compensate. If employing people becomes more expensive, the economics of locating activity here change. Add regulatory friction and higher operating costs and, at the margin, the next job, fund, structure or business goes somewhere else. And, in my view, that has been happening for quite some time.
My concern is that government has lacked sustained focus on that question. We’ve had strategies, initiatives, reviews and economic development plans. What we haven’t had is relentless attention to the basic cost and competitiveness fundamentals that a small export economy requires. And the numbers tell a rather less abstract story. Since 2020, in real terms private rents have increased by more than 20%, electricity and water costs are around 15% higher and certain commercial TRP rates have more than doubled.
I’m no Johnny-come-lately to this. Fixing growth was one of my three election priorities. Asked during my Guernsey Press podcast what I would actually do, my answer was hardly headline-grabbing: relentlessly focus on competitiveness and make it a consideration in everything government does. In other words, a to-do list of one: competitiveness. Instead, since the election, the relentless focus seems to have been on spending more money. Spending other people’s money is, as I’ve observed before, the easy bit.
My worry is that Bessent’s rather extraordinary to-do list is an early sign that the economic weather is changing. If so, there is a rather uncomfortable point for Guernsey. This last global upswing largely passed us by. We really didn’t want to enter the next downturn having made ourselves steadily more expensive and uncompetitive during the good times (well, they must have been good times somewhere). Yet that is precisely what we appear to have done.
While I was away, a new finance sector concierge was appointed, intended to help businesses and investors considering establishing themselves here. I’m sure it will be very welcoming. But before employing another civil servant to hold the hands of the hordes of businesses apparently beating a path to our door, I have a rather more basic question: why would they choose Guernsey over Jersey, Luxembourg, Dubai or anywhere else in the first place? And what are we doing about the factors that determine that choice?
Call me a bluff old traditionalist, but I’d start there.
Because you can employ as many concierges as you like. But they can’t push out the production possibility frontier. And, anoraky though it may sound, pushing that frontier out is ultimately what economic growth is.
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