Tech is the simple reason Britain will leave Europe behind

This is the next tech revolution. And it’s time to invest.

But where will it leave Britain? That’s what I want to get into today.

Unfortunately, we begin with a brief reminder about macro-economics. Brief, I promise.

GDP can grow in two ways. Population and productivity. How many people are making stuff and how efficiently they make that stuff.

The UK and especially Australia are good at GDP growth because they cheat. They have an immigration tap they can turn on and off at will to goose GDP numbers. But GDP per capita tells a different story because it adjusts for immigration.

Japan is on the other end of the scale. GDP numbers are bad, but largely because of population decline. Japan’s “missed decades” weren’t declines in terms of living standards, for example.

Which really only leaves productivity then, right? That’s the only true form of economic growth. If the same amount of people can produce 10% more than last year, we have 10% more income and stuff as a nation.

This is true growth. Not immigration-led growth – merely having more people produce the same amount each. Your GDP might be rising, but not in a way that’s meaningful for people on the ground.

But what determines productivity? Some say education, which I think is rubbish. But let’s not go there.

Instead, focus on Exponential Investor’s usual haunt, technology. That’s the biggest boost to GDP over time because it improves productivity.

It means each person can produce more, it frees up workers to produce more and it makes production more efficient in terms of waste and energy inputs relative to outputs.

But technology isn’t a widget you can just add to the production process. It requires capital and innovation. Something Britain happens to have plenty of.

The Telegraph provided two articles highlighting just that yesterday. Unfortunately, they both got caught up in “despite Brexit” themes instead of highlighting what they really mean for Britain and British investors. But first, the data.

Investment in the UK tech sector hit record highs in 2019, has doubled since 2016 and is leading Germany and France combined.

The UK gets almost half of Europe’s fintech investment.

Source: The Telegraph

All of this leads to productivity growth over time. More wealth, prosperity and of course investment gains. So-called unicorn companies which hit a billion dollars in valuation, for example. The UK dominates Europe by that measure, again doubling France and Germany’s tally.

The combination of capital markets for raising funds and innovation spending suggests Britain has a bright future… relatively speaking at least.

And no tech has the capacity to improve productivity in Britain like this one.

Right now, telecom technology is holding us back badly in many places. But that’s precisely what will soon change. Triggering Britain’s latest (productivity led) economic boom.

Which is sort of unusual. Historically, productivity booms come from new tech which creates new industries and new ways of doing things. Not just enhancements of existing tech.

Discovering the wheel triggered a lot of change. Making it out of wood, metal and then rubber improved things, but didn’t revolutionise them.

The steam engine allowed us to harness energy in a new way, enabling the Industrial Revolution. Oil merely enhanced this capacity.

Flight isn’t dramatically different under propellers versus jets. But flight itself changed the world.

But this time around, the innovation comes in the form of a scale of improvement that enables what we’d hoped and dreamt of. A radical change in what’s possible, merely from an improvement in what we can already do, but not well enough.

Driverless cars, surgeons operating on you from the opposite side of the world, machines that beat humans at any given task…

But to make all those happen, this company has to provide the gear. Another opportunity for Britain.

There aren’t many threats to all this potential. Only politics could get in the way. And it happens to be the season of politics.

Now I’m the Mercutio of Britain’s political scene. “A plague on both your houses”. But certain developments have me worried.

Immigration, for example. Innovation relies on immigration. Attracting innovators is part of every productivity boom.

And innovators are not fans of immigration bureaucracy. If Britain fails to keep its doors open to innovators, without hurdles, it will struggle to innovate.

Taxes are important too. As are property rights. But it’s the opportunity to boom that’s the key. And nationalised industries do not allow more productive and technologically advanced competition.

Britain is on the verge of a boom which would leave Europe behind. But politics is putting it all at risk.

Until next time,

Nick Hubble
Editor, Southbank Investment Research

Category: Technology

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