- The Observer
54 11.08.19 Analysis
D
owning Street must
add the likelihood of
a UK recession to its
list of possible sce-
narios after offi cial
fi gures showed that
the economy contracted in the sec-
ond quarter by 0.2%.
The prospect of a further decline
in GDP in the third quarter, which
would make a recession offi cial and
might be clearly on the cards before
the 31 October Brexit deadline,
should dominate the prime minis-
ter’s deliberations.
All areas of the economy shrank
except the services sector, which
managed to inch ahead by 0.1% in
the three months to the end of June.
There are those inside No 10 who
dismiss the fi gures as merely the
result of Theresa May’s failure to
push her withdrawal deal over the
line in March.
They murmur privately that the
aftermath of this debacle was likely
to provoke economic volatility as
companies and consumers reacted
fi rst to parliament’s refusal to back a
deal and then the uncertainties cre-
ated by the Tory leadership elections
and the perceived intransigence of
European Union leaders.
And casting an eye over the
past year rather than the past few
months alone suggests there is
something to the argument that the
economy is stronger than it looks.
GDP increased by 1.2% in the
12 months to the end of June, and
is still on schedule to grow by at
least 1% over 2019 according to
most forecasters. Compare that fi g-
ure with the annual growth rate pre-
dicted for Germany of just 0.5% and
0.1% in Italy.
Yet to dismiss the deteriorat-
ing economic situation as a symp-
tom of Brexit uncertainty – one that
I
n the fi lm Erin Brockovich,
Julia Roberts plays the gutsy
legal clerk who win s pay-
outs for a Californian com-
munity devastated by water
contamination from a giant
utility company. Less is said about
the extraordinary $134m her law
fi rm scooped from the case.
Brockovich is the socially accepta-
ble backdrop to the huge new indus-
try of litigation fi nance, where large
sums are spent on speculative court
cases in the hope of a bumper pay-
out. They are mostly dreary com-
mercial cases where neither side
occup ies the moral high ground.
Lord Turner famously dubbed much
of the City’s fi nancing activities as
“socially useless” , and critics might
say the same of litigation fi nance.
This speculative activity has now
formed a new asset class. Fancy a
punt on court outcomes by buy-
ing shares in fi rms that pursue
these cases? Thought not. Yet it has
emerged that beleaguered fund
manager Neil Woodford had put his
investors’ money into such fi rms.
Woodford owns 7% of Aim-listed
Burford Capital, which, until last
week, has enjoyed a breathtaking
rise in it share price. Its major court
action is a complex oil case involv-
ing Spain, the US and Argentina.
Some say a $10m investment by
Burford could see a $1bn payout.
Others are less confi dent. A hedge
fund that speculatively attacks fi rms
to drive down their share prices and
cash in by short-selling has targeted
Burford. The irony is not lost on
many. Burford’s share price crashed
by 60% when the hedge fund,
Muddy Waters, alleged that it was
“a perfect storm for an accounting
fi asco.” Burford furiously responded,
threatening legal action.
But it is Woodford and his small
investors who are now suffering the
fallout. The former “star” manager
had made a string of dud invest-
ments. Burford was one of his few
bright sparks. The lesson? Litigation
fi nance is only for punters and spec-
ulators, not long-term investors.will be fi xed automatically once the
dark cloud of Brussels’s infl uence
has been lifted – is to ignore some
unsettling economic trends.
Donald Trump’s tariff wars
have provoked slowdowns in out-
put across China and the far east.
Concerns that a slump in trade
will lead to a global recession have
heightened and spurred central
banks across the world to cut inter-
est rates at the end of last month.The UK’s GDP fi gures show that
in 2017, when a smooth exit from
the EU was in prospect, businesses
increased investment in capi-
tal goods by 3.5%. In 2018 that fi g-
ure had slumped to 0.2%. In the last
quarter, fi rms cut spending, which
led to a 0.4% decline on the previous
three months.
It’s possible that industrial fi rms
could emerge, phoenix-like, from
the ashes of 31 October to invest
again. But unfortunately, their
longer-term position has become
steadily weaker.
UK companies have been borrow-
ing heavily since the 2008 crash.
Most of the funds have been used to
pay generous dividends, rather than
being plough ed into new equipment
or research and development.
According to analysis of industrial
companies by US risk assessment
company Credit Benchmark, British
fi rms have allowed their fi nancialsituation to deteriorate to such an
extent that they are much more vul-
nerable to a shock than their peers
in Europe or the US.
Credit Benchmark’s risk indica-
tor shows that EU companies, acting
prudently to shore up their fi nances,
have cut their borrowing since
2016 to the extent that their credit
risk has improved by 10%. Over the
same period, UK industrial compa-
nies have allowed their credit risk to
deteriorate by 25%.
This trend cannot be said to pro-
vide a springboard for growth.
Maybe Britain can prosper without
an industrial base, just as the small
group of economists that support
Brexit believe. Few others would
agree. Industrial exports remain the
bedrock of developed economies.
And for that reason a recession in
the autumn should be taken seri-
ously as an indication of the UK’s
underlying weakness.I
n another sign that the
super-rich have had enough
of Brexit Britain, 6,000 non-
doms – those who live in
the UK but pay no tax on
their offshore income –
have ditched Blighty for, presuma-
bly, another locale that promises to
turn a blind eye to taxing most of
their vast fortunes.
Treasury fi gures last week showed
the number of non- domiciled peo-
The super-rich are getting out, and it’s not over Brexit – or even Corbyn
Fancy a punt
on lawsuit
fi nance? Look
where it got
Neil Woodford
ple in the UK dropp ing from 98,500
in 2016-17 to 78,300 in 2017-18.
Advis ers to the super-rich pounced
on the news as a sign that the ir cli-
ents, many of whom supported
Brexit, have lost faith in the UK and
are taking their money elsewhere,
leaving the exchequer £2bn poorer.
But Brexit paralysis is not, appar-
ently, the main reason for the exo-
dus. For the super-rich there is a
fate worse than a hard Brexit , andthat’s a government that promises
to tackle the widening gap between
rich and poor. With the prospect of
an early general election , many of
the super-rich are not willing to wait
around to take the risk.
Jeremy Corbyn has vowed to
introduce “wealth taxes”, such as
reintroducing the 50p income tax
rate for those earning more than
£123,000. Labour has also mooted
tighter rules on inheritance tax andpledged to start levying VAT on pri-
vate school fees.
Those HMRC fi gures, however,
are for non-doms who left before
April 2018 – some 16 months ago,
when the prospect of a Corbyn-led
government seemed more remote.
Perhaps their motivation dates
back to the changes introduced
by George Osborne. The former
Conservative chancellor introduced
new rules to crack down on thoseabusing non-dom status to avoid
paying their fair share of tax.
“British people should pay British
taxes in Britain – and now they will,”
Osborne said when he announced a
crackdown on permanent non-dom
status in 2015, two years before it
came into effect. “It is not fair that
people live in this country for very
long periods , benefi t from our pub-
lic services, yet operate under differ-
ent tax rules from everyone else.”Industrial exports are the engine of
western economies. Ours has stalled
Business leader
Nissan’s car plant in Sunderland: possible Brexit-related recession should be top of the PM’s in-tray. Anna Gowthorpe/PAUK companies have
been borrowing
heavily since 2008,
and used the money
to pay dividends
rather than invest in
new equipment
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