OUR Chief Economist Trevor Williams addresses key treasury questions

1 What do you see as the key things the Government needs to do to stimulate domestic growth?

This is an interesting question: can the Government generate growth or does it allow the private sector to do so? I think that the answer is that the Government sets the framework and  encourages market forces to work in a positive way. In the context of its huge spending power, it must be transparent and act in a way that stimulates competition and innovation in the  private sector.

In terms of fiscal and monetary policy, the Government should ensure it supports and encourages private sector economic activity in a sustainable way. This means being fiscally prudent and keeping Government debt at a level that does not ‘crowd out’ private sector borrowing, which is more productive and so delivers superior economic benefits in most sectors in the long run. In practise, this entails the Government keeping its debt and its total spending to relatively low shares of total GD P, so as not to have the result of sub-optimal outcomes for growth.

 

2 When do you expect to see real growth in the UK economy?

Well, the evidence shows that the UK has had two straight years of economic growth. So you could argue it is already happening. The point is, how strong will growth be, and when can it get back to rates seen in 2007, for example, when it averaged 3.5%? This is tougher to answer. It may be 2014 or 2015 before the economy sees annual average growth of close to 3%.  But the good news is that we still expect positive growth this year and next.

3 In the current low rate environment are companies better off using excess cash to pay down debt rather than looking to invest it?

Certainly companies seem to have taken the view that they should save rather than invest. Arguably, data showing that UK firms have one of the highest saving rates in decades  supports that view. But s assets are cheaper and interest rates are low, it would make sense for some companies to consider whether this is a good time to invest in other companies (either as acquisitions or mergers), and to invest in plant and machinery ahead of a stronger economic upturn.

 

4 The Chief Executive of a leading FTSE 100 company recently revealed that they are sweeping cash out of the eurozone on a daily basis. Is this a course of action you would recommend?What other contingency plans should companies have in place against a possible euro break-up?

Strategies for surplus cash should always be based on a company’s particular operational issues, matching where their assets and liabilities sit to their internal risk metrics. What I would say is that this action is consistent with the low levels of consumer and business confidence in the euro area, which do seem to be holding back the economic recovery in Europe – and perhaps beyond.

Plans for a euro break-up should at least consider the effects on a company’s balance sheet, in terms of where its assets and liabilities are, and the potential currency, FX or funding  implications in euro area economies. There should also be plans for supplier disruptions if goods are sourced from affected countries, contingency planning for the return of a number of currencies and resulting costs, and hedging should be high on the agenda. Some companies may also want to consider the legal implications from a balance sheet perspective if a contract is with euro area economies.

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