Economist weighs in on UK investment

Simon French, chief economist at U.K. merchant bank Panmure Gordon & Co. and columnist for The Times newspaper, will be delivering the presentation "Economic Overview-Walking on Broken Glass. on Wednesday, October 9 at the Annual Hotel Conference.

Prior to joining Panmure Gordon, he was a senior civil servant, most recently at the cabinet office as chief of staff to the U.K. Government’s COO. He holds undergraduate and postgraduate degrees in economics and finance from Durham University and is a member of the Government Economic Service and the Society of Professional Economists. 

Ahead of the forum, French shared some insights into the current state of the hospitality sector.  

How is the economy looking from where you are?

Since the Brexit referendum, the U.K. has been on the naughty step with international investors. U.S. investors are not allocating money into the U.K. at the same levels as usual and won’t change this approach until Brexit has a resolution. Having said that, there is still a massive weight of global capital chasing alternative models, such as fixed assets with reliable yields like hotels, hostels, etc., so the hospitality industry is in a good position to retain inward investment. 

I think the global yield compression has further to run, and lowering government yields will drag down yields in corporate debt markets. Asset values will likely hold though, as low-interest rates will continue to support selling prices. Part of the reason that interest rates are unlikely to rise is that public spending on health, education and defense would be the areas to suffer as the government will have to find money from these budgets to pay the increased interest bills.

Ironically, given my opening sentence, I am one of the city economists most sanguine about Brexit. Whilst the uncertainty surrounding the E.U. is having a near-term negative impact, the U.K. economy is flexible enough to adapt to any changes that eventually materialize.

Simon French. Photo credit: The AHC

The depleting numbers of retail workers could be re-deployed into the hospitality sector, solving the impending labor issue. What say you?

An admirable solution. Unfortunately, those workers leaving the retail sector are going to be in high demand given the high level of vacancies in the digital sector or construction industry. Hospitality must get used to competing for workers in an increasingly tight labor market.

Where the hospitality industry would be wise to look is the +55-year-old segment of the workforce. These baby boomers are keen to keep working in large numbers as they are living longer, remaining healthy and increasingly unsure over the value of their pensions. This age group is a massive growth area with approximately 6.5 million (20 percent) of the workforce fitting into this segment. This will only increase over the coming years. However, their requirements are often flexible, part-time working. Not an impossibility for the hospitality industry but it will require a shift in mindset and practice for employers, both in hospitality and other sectors, to recruit in this area of the labor market.

Automation. Friend or foe?

That very much depends on your viewpoint, and mine draws on the U.K.’s recent experience of carwashes. Let me explain. Since 2008 the U.K. has experienced a real wage decline which has essentially created an environment where workers are becoming relatively cheaper to employ than capital. There are now more manual car washes in the U.K. than automated ones compared with 10 years ago as it costs less to pay manual car washers than it does to raise the capital, build the structure, install the technology and keep the automated car-wash system operating. This is an example of an industry that is being de-automated but also poses a wider question in relation to productivity. Overall automation presents huge productivity opportunities for the economy.

The challenge that comes with automation is to ensure that workers’ skills keep pace with our changing economy so they can be a complement to automation rather than having to accept lower wages to compete with the robots.

How does this Brexit saga end?

Assuming Boris Johnson becomes the next Prime Minister, I think he will attempt to put forward a no-deal Brexit, which will be blocked by Parliament. This will likely lead to a second referendum in October. I think the withdrawal agreement will be the most popular outcome, but so much hinges on how this choice is presented to the electorate.

Assuming the U.K. does end up leaving the E.U., we will spend much of the next decade negotiating trade deals and regulatory agreements with various countries across the world. Parliamentary bandwidth, currently consumed by Brexit, will remain saturated for many years to come. 

And on that cheery note, see you at The AHC. Given the current pace of change at Westminster, I’ll be writing my presentation [that] day to ensure it’s as current as possible.

French will be delivering the session "Economic Overview-Walking on Broken Glass" at the Annual Hotel Conference, presented by Questex, parent company of Hotel Management magazine. Learn more and register here.