Mark Berrisford-Smith, the Head of Economics for HSBC UK Commercial Banking, gave an insightful address to Buckinghamshire Business First’s Focus Funding event in High Wycombe last week. He opened with the comment that the next economic downturn is closer than the last and then went on to say that can’t be a surprise since the last one was 7 years ago…

The economy is probably within half a percent of full capacity. This puts pressure on inflation; earnings are already rising faster than CPI, increasing the likelihood of a rise in interest rates next year (Mark was betting no later than Feb-16). But the biggest challenge is productivity, with the Office for National Statistics estimating that current productivity will improve by just 0.25% this year.

The chancellor’s numbers work (very roughly) like this. The UK deficit is running at £90bn. George Osborn is targeting a £30bn cut in public spending, leaving £60bn to come from economic growth. However, the 2 main factors influencing such growth are the increase in the working age population, currently 0.75% pa, and productivity growth, currently 0.25%pa, so just 1% in total.

This is nowhere near enough to eliminate the rump of £60bn deficit. In addition most of the working population increase came for immigration last year and the government is committed to driving this down. So the only answer is an increase in productivity. That needs skilful and effective investment by business.

This can be helped by wise support from the government, including support for SMEs and financing, world class skills to execute the changes necessary and an overarching embracing of technology to drive improved efficiencies. The incentive is clear, when the next downturn comes, the chancellor will need zero deficit and higher interest rates to avoid being cornered without the tools and weapons with which to fight.

If the strategy doesn’t work to deliver this, the UK will be in for another soaking…