The UK economy is primed to surge to success next year regardless of who wins the election, Vanguard’s top economist has said.
“The past is behind us, and the same with the stagnation for last year,” said Joe Davis, global chief economist at Vanguard told City A.M.
Vanguard predicts that the UK economy will grow by close to one per cent in the current quarter as the cost of living crisis that has plagued consumers begins to ease.
“Where the upsides to growth is coming from is the consumer because of the increase in disposable income and some of these inflationary pressures easing off,” Davis explained.
Currently, Vanguard is expecting a “gradual” decrease in interest rate cuts from the Bank of England, he added, at “about once every quarter”, which will further push growth and optimism in markets.
The chief economist also argued that, regardless of whether Labour or the Tories are successful at the election next week, the UK should be ready to surge into economic prosperity next year.
Instead, Davis argued that the effects that politics have on the UK economy are far more long-term as structural reforms will take years to fully impact the productivity of a country.
“We generally don’t see elections having a material impact on the economy and rarely on the markets,” he explained.
“I’m not saying there’s no volatility up to the election. If there was a change, it would be a really big surprise. You could see adverse reactions, but it tends to dissipate,” he added.
Artificial Intelligence
Davis has also recently published a paper on ‘megatrends‘, the macroeconomic trends shaping the future of the global economy, in which he argued that artificial intelligence could be almost as impactful for the economy as the spread of electricity, and more important than the internet and computers.
He explained that just as electrification birthed new sectors of work, like the entertainment industry.
The paper authorised by Davis and others at Vanguard estimated a 50 per cent chance of AI being “transformational” for the economy, boosting US economic growth by two percentage points.
AI could have massive impacts on sectors beyond simply the slight productivity boosts currently seen by the use of tools like Chat GPT, the paper argued. It could allow significant developments in fields such as medical research and education.
“It has to be in parts of the knowledge economy because that’s where 80 per cent of the jobs are in the City of London,” said Davis.
However, if AI “fails” and does not lead to a large boost in productivity and new industries, then other headwinds for developed countries, like a rapidly ageing population, could cause decades of stagnation.
Demographics is another important trend that Davis focuses on. He argued that without the 3m recent immigrants to the US, the tightness of the labour market would have caused the Federal Reserve to hike rates to six per cent, likely leading to a recession in the world’s largest economy.
Speaking to Davis, he was surprised that the internet and computers had not actually provided as big a boost to the economy. Ultimately, they had failed to create the same impacts that something like electrification had.
Vanguard’s research estimated a 0.3 to 0.4 per cent boost to the economy over the years. Still, while the internet “has made some purchases more efficient, these were goods and services that were going to be purchased anyway”.