THE BLOG

How Come UK's Doing So Well Given Europe's Malaise?

27/11/2014 10:58 GMT | Updated 26/01/2015 10:59 GMT

A survey recently published by the Institute of Chartered Accountants in England and Wales (ICAEW) showed that 78 per cent of small and medium-sized companies (SMEs) in the UK believed that interest rate rises would not adversely impact their businesses. My own view is that interest rates will not rise for a considerable period given the problems that are being experienced in Europe.

Consensus: the momentum must slow

Indeed, the real fear is that inflation will continue to fall and the ECB has very little means of preventing this from happening. It has belated accepted that quantitative easing (QE) is an essential tool to try and prevent this and the realisation is dawning that Europe may end up in the position that Japan found itself in for twenty-five years if it doesn't do something fast. Given that the UK does over half of its trade with Europe, this means that it is highly unlikely that interest rates will rise in the near or medium term.

Unlike the Germans, we don't fear inflation

In fact, the real mystery is how the UK economy has managed to do so well in the recent past given the performance of our neighbours. The general consensus is that this momentum will not continue and that growth will slow next year. The risk is that growth slows more quickly than expected and that we find ourselves in a similar position to the rest of Europe as inflation continues to decline.

Unlike the Germans, we are not afraid of inflation and have a general belief that inflation is helpful when national debt is running at a high level and so a few more rounds of QE would undoubtedly be forthcoming. But the lesson that must be learnt from Japan is that this will not necessarily work. In the UK, we have the ability to reduce taxes (unlike the ECB), which may help to stimulate demand, but the real concern is the lack of scope to increase wages, which is what is really needed in order to stimulate growth.

We should adjust univesity fees to encourage computer science

So how do we stimulate growth against this background? My view is that the fixes are all very long term. We need to build our technology sector - this is what has powered the US economy over the last 15 years. There are signs that this is being given more emphasis, but there is a long way to go. We need to put more emphasis on Computer Science in our schools and universities and I would advocate using the university tuition fee system to encourage young people to study science subjects. If it cost £12,000 to study English and £3,000 to study Computer Science or Engineering at university, the number of scientists would rise significantly. Of course, we would need to make more places available in these subjects and it is essential for us to do so if we are going to compete more effectively in the global economy and create growth.

A focus on creating technology businesses is the only way forward. The government has provided plenty of support to start-up businesses through the Seed Enterprise Investment Scheme and the Enterprise Investment Scheme, so the key is to train more scientists.