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Cardiff Business Club interviews: Paul Donovan

On Friday 12^th April, over 150 business leaders from across the capital joined together at St David’s Hotel to hear from guest speaker, Paul Donovan in an event kindly sponsored by UBS Wealth Management.

Paul Donovan is the Global Chief Economist of UBS Global Wealth Management, member of the Global Investment Committee, a UBS Opinion Leader, and a sponsor of UBS Speak Up and a UBS Pride Ally.

He is responsible for developing and presenting the UBS economic outlook, marketing the UBS view on economics, policy and politics around the world. Undertaking such a role invariably sees him regularly appear in the media, although he is a reluctant Tweeter on economic issues.

Before taking to the stage Mr Donovan, spent a few moments to be interviewed by Kara Buffrey and Sadie Jones from Clearly PR & Marketing Communications on behalf of the Club.

Here’s what he had to say about Brexit and its possible impact of the Welsh and wider-UK economy:

Kara Buffrey (KB)

Paul Donovan (PD)

KB: Brexit was supposed to happen today, so did you have to change your speech at all?

PD: No, we have never assumed that the Government or the EU would keep to time. We were always expecting an exit towards the end of the year, perhaps in December. The current date is October, but we will see.

KB: As we saw in the aftermath of the referendum and the general election, the British public can be prone to changing their minds. There was a petition running recently that got over six million signatures, leaning to remain within the EU. How reliable are these petitions and do they truly reflect public sentiment?

PD: The petition was very interesting as the parliamentary website requires petitioners to put in their postal code. What that means is that you can see where most people are interested in having a second referendum - and it was very obvious that there was a very strong concentration in London. Typically, 20 to 25 per cent of constituents were asking for a referendum in London. As well as major university towns such as Oxford, Cambridge and Bristol – who also favoured a re-vote.

But most of the country wasn’t that interested. I think it’s not ‘do people want a second referendum or not?’ It’s how motivated people are. I think that people are not as motivated by the debate anymore - they’ve switched off.

KB: Do you think petitions like this have any kind of power or gravitas in terms of leading to another vote?

PD: I think it’s very unlikely that we will have another referendum. Parliament has not signalled support for rerunning the referendum. Whether there should be a referendum on the different types of deals - that’s another question.

It’s tricky because if we run a second referendum, should be have a second on Scottish independence for example? What happens if the vote offers a lower turn out but a larger skew towards remaining? Is that more valid or less valid?

There are lots and lots of uncertainties around this, and I think that the idea of having a second referendum to repeat the first one is not something which is politically going to fly.

KB: There have been a number of marches in London - Led by Donkeys would be a good example - that are really emphasising the Remain campaign.  Do you think public opinion is being stifled towards remaining because of this loud public voice?

PD: No, I’m not sure that public opinion is being stifled. One of the advantages and disadvantages of social media is that you can always find people that share your views and cluster there. I think frankly, that most people are not terribly interested in the topic at all - we are seeing this in the economic numbers. Consumers are still happily shopping, ignoring what’s going on.

If you look at the BBC website the most read story is never Brexit - but Harry and Meghan Markle having a baby… that’s important! I don’t think there is repression, I just think people have disengaged from the topic at large.

KB: Wales voted overwhelmingly to leave the EU - despite being one of the largest beneficiaries of EU funding - if the referendum was to be held today do you think it would impact the Welsh vote?

PD: One of the very clear divisions we saw in the vote was rural vs. urban. Wales is a more rural part of the United Kingdom. With that in mind perhaps it’s not the ‘Welsh’ people that want to leave – but more that rural people are more inclined to vote that way.

The geographical breakdown of the petition for a second referendum would certainly suggest that there hasn’t been a sea of change in opinion for Wales, or rural communities throughout the United Kingdom.

KB: In terms of a no-deal Brexit, do you think it’s still on the cards?

PD: We have never thought that a no-deal Brexit would be particularly likely. Europe doesn’t want it, the UK doesn’t want it, the majority of Parliament don’t want it - and now with changes in legislation it is something the British Government need to work to prevent.

In some ways it’s the wrong way to look at it. We have a deal to discuss the final settlement and we are focused all the time on the deal. But the deal isn’t the important part. What’s important is what happens two to three years in the future when we have the final settlement with Europe.

KB: What are the implications for the financial services sector – arguably one of the strongest performing areas of the Welsh and UK economy?

PD: The financial services sector is one area where the UK has considerable competitive advantage compared to Europe. The idea that Frankfurt, Paris, Madrid or Milan could take over London’s position as a financial services centre is not especially realistic.

80 per cent of European financial transactions take place under UK law, so the centre of gravity will remain relatively strong. In the very unlikely event of a no-deal exit - I expect what you will end up with is a no-deal exit and very quickly afterwards, some kind of settlement with financial services being agreed.

KB: It’s hard to see a comparable time in political history where there has been so much business uncertainty. How would you advise business leaders to plan, when they don’t know exactly what they are planning for, in order to futureproof their business?

PD: This is a question which goes beyond the immediate politics, because what we are also experiencing are the very early stages of fairly traumatic change in terms of the global economy. This is what economists call the fourth industrial revolution.

Technology isn’t actually the important part about this, everyone obsesses about technology, smartphones and artificial intelligence - but actually they are probably the least important things. The most important aspects during a revolution is that it is revolutionary. Society also changes and it’s the social changes that matter.

I think what is needed for businesses that are looking ahead in a more political and technological uncertain landscape, is to make sure they have as much flexibility as possible.

The honest truth, which no economist should ever admit, is that we can’t predict with a great deal of precision what the global economy is going to look like in 10- or 20-years’ time. A business that still wants to be here then has to have a strategy which involves flexibility - the ability to change.

It’s very important to also have as much flexibility in regard to your labour force as possible. To have a diverse labour force, diversity of opinion - to be challenged - because in a changing world it doesn’t matter whether you’re the Chief Executive.

Your opinion may be wrong. It may be that the apprentice or summer intern has got the next really great idea, and you have to be willing to listen to people that challenge your opinions.

KB: Perhaps one of the more interesting things to come post-Brexit is that unemployment is at a record low, yet at the moment we are seeing more of a flatline in hiring intentions. How do you see the job market panning out over the next six months until the new deadline and beyond?

PD: We can see a lot of change in the UK labour market at the moment. For one thing, there has been a big increase in self-employment. About two thirds of the jobs created in the UK in the last ten years has been self-employed. This is because companies aren’t necessarily employing workers, they are employing contractors on a fixed term contract or outsourcing to somebody who is self-employed.

That’s fine but that means that actually when we look at something like hiring intentions - your hiring intentions might actually be: “I’m not going to hire anymore workers, but I am going to hire more contractors”. The data on this has become a lot more confused. What I would argue is happening, is that companies are choosing not to invest - not to cancel investment - but to delay investment because it tends to have quite a long-life span.

If you’re choosing not to invest, then you are more likely to hire workers or use contract workers to boost your business as a more flexible, short-term substitute for the longer-term investment decisions. As I look ahead the uncertainty will likely continue to delay investment, but because of that, it will continue to support the labour market.

I would argue though that we are now reaching the point where we are probably running out of workers, and so we shouldn’t necessarily expect a big drop in unemployment - or even further big increases in employment data.

KB: You are very active in the media and you’ve spoke about Brexit too. What do you think about the way that the media are portraying Brexit and are they guilty of sensationalising it for the sake of readership?

P.D: Economists can prove that the media has become more sensationalist in recent years. But I think we are in a more sensationalist environment where you tend to exaggerate and potentially polarise concepts.

I think to some extent this has been true with Brexit, not perhaps as dramatically polarised as one might expect - but there has been a polarisation of opinion on this. I also think there has been a lot of criticism of politicians - some of it undoubtable fair - but I think some of it is an attempt to demonise Parliament or the House of Commons to suggest that it’s somehow incompetent.

Actually, this is an extraordinarily complicated issue. By a large the House of Commons is doing what it’s supposed to do in this situation. So unfortunately, can’t come to a decision - but it is supposed to cover all sides of the debate.

I think there has been an exaggeration and a push towards polarisation in the media debate, but overall, I think because this is such a very complicated issue. The willingness of individuals to engage into understanding something which doesn’t at least immediately seem to be affecting their day to day lives, is low. Ordinary people in the day to day course of their business have other things to worry about and other things to focus their attention on.