Just as I predicted, the Bank of England has to admit it has been too pessimistic. Yesterday the small increase in the Q3 forecast was the bare minimum they had to do, as many of the numbers for Q3 are now in and their forecast was looking silly. Retail sales were up a thumping 6.2% in August 2016 compared to a year earlier, giving the lie to the idea of a sharp post vote recession which the Bank implied in May and got into headlines from their news conference.
Meanwhile the government has reflected and decided to press on with Hinkley nuclear power station. Their renegotiation or pause produced some control over EDF selling the investment on and a statement that other measures will be taken over national security for future investments. There was no change to the very high strike price for the power built into the contracts, and no change to the fact that foreign interests will finance it and will therefore take all the spare cashflows as interest and dividends once the station is producing.
When I asked about this the Minister rightly stated that the £18bn inward investment is a positive balance of payments flow during build. He stressed that all the construction risk – risk of cost and time overruns – rests with the French and Chinese investors. I was making a different point. I want the government to find ways for any future power station investment to get them financed in the UK with UK capital. It should be possible for a power station like Hinkley to find UK investors who would put up bond capital, where they did not take any construction and project risk, but would get decent interest payments and eventual repayment of capital when the plant is running. It might also be the case that some UK investors would want riskier capital investments where they did take some project and construction risk in return for higher possible rewards.
The danger of the Hinkley model is a weak balance of payments position for many years to come once the plant is producing revenues. Overseas investors will expect a decent reward in the form of interest and dividends. It’s but a step away from importing our power through the interconnectors, where the whole cost of the power is negative on the balance of payments. With Hinkley a proportion of the very large revenues it generates will flow abroad. We need to put in place some UK power where the plant is here and the investors are here. When the government can borrow at 1.5% for 50 years we could even consider putting some state cash to work for say 3.0% on a low risk priority capital basis and make a turn on the money, though I prefer private sector investment and think it is available for the right bond instruments.