Speaking at the ICAEW Finance Directors conference today, he told the audience that “there is life after debt, as Iceland has proved.” He pointed to the splitting-up of Czechoslovakia and the Soviet Union as evidence that countries can recover from fiscal challenges.
“Monetary union has broken up in the past and countries survive. It is not the end of the world,” Williams said.
Contrary to much of the current economic thinking, Williams downplayed the impact of Greece’s exit. It would lead to some disruption, he said, but it could also revitalise parts of the Greek economy that are currently moribund.
Looking at the global economy as a whole, it is expanding and is expected to double by 2030. However, there is a dichotomy between the growth rate of emerging economies, which is slowing down but from such a high level that they are still performing well, and developed economies which are struggling to return to growth.
In particular, the UK is still well below where it was in 2008, which is the longest period of retraction since the 1930s’ depression, and it is not likely to claw its way back up until 2016.
In the UK, back in recession, Williams predicted that there would be a downward revision of the Q1 growth figure of -0.2 to as low as -0.3, the same level of contraction as in Q4 of 2011.
This runs counter to a general reaction that the Q1 figures were unreliable and would be revised upwards to as high as 0.1.
Williams said that there are a number of reasons why the UK economy is stagnating. Uncertainty about what is happening in the eurozone is having a major impact because it accounts for 62% of all UK exports. But, he warned that lack of domestic consumer demand is not helping.
Households and private sector companies are saving money, repaying debt and reducing gearing, while the public sector is retracting after experiencing a sharp rise in liabilities thanks to government cutbacks.
Nominal pay (+1%) has not kept in pace with inflation (+5%), which may make the UK economy more competitive in production terms but leads to weaker consumer spending. Companies are not helping by not spending their reserves.
The current cutbacks in public spending account for only 13% of what is planned to happen over a seven-year period, he warned, saying that spending has to fall back in line with what the UK gets in tax receipts.
Otherwise, the debt will continue to grow and put the UK’s triple A rating in jeopardy.
On the upside though, interest rates are likely to stay low and will probably not begin to rise until 2014. Williams concluded that the banking sector has gone a long way towards repairing its balance sheet and is lending again – at a cost.