There is hope on the horizon, but high debt hangs over Britain’s future

As we look forward to 2021, there is much to be hopeful for. Vaccines pending, much of normal life will return and the economy can recover even more quickly than predicted by the Bank of England and the Treasury’s independent forecaster, the Office for Budget Responsibility.

While bedding in a Brexit deal will prove to be difficult in the weeks and months after 1 January, there is the prospect of businesses beginning to see through the fog of uncertainty that has clouded the past four years.

Britain has a vibrant business culture and there are many small and medium-sized companies that want to expand, make a profit and employ more people, not least in the digital space that has widened and deepened in the past year as online purchases have replaced face-to-face transactions during the pandemic.

As one of the most digitally savvy countries in the world, the UK is well placed to compete for new business across the globe, even with the crippling disadvantage of being outside the single market and customs union of our nearest trading bloc.

That said, there are many restraints on Britain’s prospects. One that has been highlighted by the International Monetary Fund is the high level of debt sitting on the balance sheets of UK corporations, government – local and central – and its low-income consumers.

The UK was among eight leading countries that the IMF said played host to corporations with debts that were so huge they would struggle to finance them should there ever be a major recession.

The current low rate of interest within the eight countries (including the UK, US, Germany and Japan) has encouraged businesses to increase their borrowing, often to finance payouts to shareholders rather than investment, to a point where 40% of the corporate debt pile – some £15tn – would be impossible to service if there were a downturn half as serious as that of a decade ago.

Government debt in the UK has also risen, mostly to support the economy during the pandemic, just when Boris Johnson and his ministers wanted to increase spending to fix many of the problems made worse by 10 years of austerity.

With a bill for the pandemic that will stretch over the next few years, the government faces the prospect of the overall debt to GDP ratio increasing from the 105% predicted for this financial year to 120% and beyond if austerity is to be reversed.

If this wasn’t bad enough, the pandemic has forced millions of low- and middle-income earners to borrow to keep their finances afloat. Aggregate figures for the UK disguise a widening gap between those with and without loans. Mortgage borrowing, for instance, is not at high levels historically, but is increasingly concentrated in a relatively small group of younger households while those over the age of 60, if they are not renting, own their home outright.

Likewise, Bank of England figures for consumer borrowing almost disguise more than they illuminate, and a casual glance at the overall figures would leave the chancellor neither shaken nor stirred.

Yet the UK’s debt charities have warned of a borrowing frenzy by those with the weakest finances, putting a ticking time bomb under the large number of households that spend every penny they earn, and are therefore crucial to the recovery of the economy.

In an age of anxiety, when the threat of disease combines with a longer-term fear arising from a loss of competitiveness and skilled private sector jobs, these issues will be tricky for any government to manage.

That the government should borrow extra funds to get the economy back on track is clear. That it is capable of borrowing wisely, and for a greener future, is in doubt.

Tesla’s belated inclusion in the S&P 500 index last week was a rubber-stamp for the electric car pioneer’s arrival in the upper echelons of the US corporate world – as if confirmation were needed for a company that has shaken the global automotive industry from its reliance on fossil fuels.

Shortly before Tesla’s entry, its shares hit a high of $695 (£518), valuing the company at north of $650bn. A retreat in the week since has put that at closer to $600bn. That puts its value at more than the next seven largest carmakers combined, despite planning to produce a small fraction of the volume of vehicles its rivals churn out every year.

For those looking at whether the run can continue, there are some ominous signs. Among the reasons for the shares retreating in the past week was a report that Apple, another of the S&P 500’s heavyweights, was hoping to bring out an electric car in 2024. Reuters reported that Apple’s car would bring self-driving capabilities and significant battery advances.

That would be quite an about-face for Tim Cook. Tesla’s brash boss, Elon Musk, says his Apple counterpart turned down the chance to buy the carmaker when it neared bankruptcy – probably in 2017.

Competition from Apple is enough to give even the most bullish Tesla analyst pause. But even without that, the current sky-high Tesla valuations are based on optimism over its autonomous driving systems and solar energy business. Those are two highly competitive and fast-developing fields.

Tesla has built up an undeniable lead in battery electric cars, and the impressive fundraising abilities that go with its huge valuation give it a good chance of defending its position. However, the Apple rumours point to an uncomfortable truth about electric car manufacturing: the hardware barriers to entry are much lower than before, and the software battle has barely even begun.

So it turns out that even uncompromising super-spy James Bond has his price. MGM, the Hollywood studio behind the mega-franchise, is in the market for a buyer, touting a potential price tag of $5.5bn (£4.1bn).

Only a decade ago MGM, once a Hollywood superpower boasting a library of titles from Gone with the Wind and Ben Hur to the Rocky franchise, was forced into bankruptcy with a debt burden of $4bn.

Fast-forward to the Netflix-propelled era of the streaming wars and content owners have become kings, able to command sky-high prices to license, or sell, their products. And the evergreen Bond franchise, now on its 25th instalment (delayed until April in the hope of avoiding pandemic restrictions), has a global fanbase few can match.

MGM began to sniff out potential buyers at the beginning of the year, holding preliminary talks with Apple and Netflix, among others, before the effort fizzled out. But since then a new generation of deep-pocketed streaming competitors, from Disney+ and Apple TV+ to HBO Max, are fuelling a renewed wave of content hyper-inflation. This month, Disney said its streaming service was doing so well – racing to more than 73 million subscribers in a year, putting it behind only Amazon and Netflix – that it had moved to more than triple its subscriber target and double annual content spending to $15bn by 2024.

MGM has been quietly building value, making $1bn in TV and film revenues last year. And it is broadening a perceived over-dependency on Bond, with Rocky spin-off Creed proving a film franchise success as well as TV hits such as The Handmaid’s Tale. Timing is everything: MGM is banking on now being the moment to cash in on its library of 4,000 film titles and 17,000 hours of TV programming.