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Monday, 9 June 2008

Nice summer days and the economy

My posts are getting fewer and further between on these nice summer days. Sadly the problems in the financial markets show no sign of abating. Although short term money seems to have stabalised and the banks are slowly getting through the initial problems of the credit crunch, market instability remains.

It is quite amazing to see oil prices shoot up by $10 in one day, all on the back of a statement by the ECB that it might have to raise interest rates. Longer-term borrowing rates have also been rising rapidly over the past month following the release of the Bank of England's inflation report, which has highlighted that inflation will remain well above target for some time.

In the next few months the slowdown in the economy will become increasingly apparent. Unemployment, as measured by the claimant count, actually rose in the first quarter, despite what the intial stats were telling us. This will continue to rise over the next two quarters, at least. Higher oil, food and mortgage costs will prevent households from spending, harming the retail industry. Business in general will be hit by higher borrowing costs and the slowdown in the general economy.

All in all things are looking fairly bleak for most of 2008. Until market fundamental return things will not get back to normal. Currently those working in the financial markets don't really know what's going on and therefore react aggresively to every new piece of data. Trichet at the ECB must have known this before his announcement last week - it seems strange that he would have mentioned his worries about the impact of higher inflation (significantly caused by high oil prices) and therefore pushing oil up even further in the process. I believe he should have waited and allowed a period of calm in the oil market, allowing for some sort of normality to return.

Finally I suggest that perhap it is time for the trading floors to calm down for the summer months and enjoy these nice hazy days. Perhaps taking a couple of months off to come back refreshed, rested and with hopefully a greater sense of calm and reality. Sadly this isn't likely, the only people in the City who are going to be enjoying the sun this summer are those that lose their jobs...there may well be quite a few of these people!

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Wednesday, 12 March 2008

Budget 2008 – how to make a financial crisis seem dull

Today saw the announcement of Alistair Darling’s first budget. Not the most interesting budget because the Chancellor had little room to manoeuvre. On the one hand, the government is becoming increasingly unpopular which is stopping them from making any major steps towards raising taxes. On the other hand, the Treasury has overspent in previous years, which has reduced their ability to increase spending now the economy is entering a period of slower growth – and could really do with a little help from the Government.

One major announcement was that the 2008 GDP growth forecast for the UK was revised down by 0.25% to between 1.75% and 2.25% in today’s budget. This still looks like a very high estimate given that the survey of independent forecasts, as mentioned on page 169 of the Red Book, presents forecasts that range from between -0.1% to 2.1% and average of 1.7% in 2008. Independent forecasts are also in a period of being downwardly corrected by many banks and consultancies. As the year continues the Treasury forecasts are likely to look increasingly unrealistic.

Other measures that will impact upon work and working life:

• Income tax changes confirmed for April. Basic rate drops from 22 per cent to 20 per cent and the 10 per cent band is abolished.

• New charge on non-domiciled residents to be introduced from April and won’t change during this parliament, and next if Labour remain in power.

• Public sector employment has fallen in the past year; private sector employment risen.

• Around £60m to be spent over the next three years to encourage people to move into work and to move up the employment ladder.

• Spend of £10m over the next five years to create a new science fund for teachers in secondary schools.

• Increase in the amount of funding for adult training. Investment of £200m in poorly performing schools to try and improve GCSE grades by 2011.

• Long-term sick to attend “work capability assessments” from April 2010.

• New contract to help parents into work involving a commitment to find employment. Benefits for working families will be boosted.

• Child benefit will be up to £20 per week for the first child in 2009, a year earlier than planned. Child element of child tax credit to be raised by £50 above inflation a year.

• Tax-exempt limits on individual savings accounts increased to £7,200 a year for standard accounts and to £3,600 a year for cash accounts.

• Launch of a “savings gateway” in 2010 to encourage people to invest.

…and worst of all:

• Beer duty to increase by 4p per pint, wine up 14p a bottle, cider up 3p a bottle and spirits up 55p a bottle.

Increasing taxation on alcohol and large cars were the only areas the Chancellor could get away with any major increases in taxation. With all the fuss about “binge” drinking and anti-social behavior the Treasury has decided to take advantage of this situation, increasing the duty on alcohol by 6% above inflation. This has been welcomed by the British Medical Association, but has raised concerns from breweries that sales will fall and more pubs will continue to shut.

It is unlikely that the Chancellor was too worried about the health benefits of high taxes on alcohol, and was more interested in the raising revenue, but perhaps that’s just the cynical views of a man who likes a pint.

All in all this was an uneventful budget that will not be widely remembered. The key things to take from this are: the government are likely to have got their sums wrong; there have been some moves towards reducing child poverty; there has been some simplification of the tax system (a good thing but could go further); and if you smoke, drive a big car and like to drink then the government thinks you are a bad person and wants you to pay for it.

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Wednesday, 16 January 2008

Labour market statistics - hiding the start of slowdown 2008

As I mentioned yesterday the Labour market statistics were released today, and as I expected they have yet to highlight the slowdown in the wider economy. However, with economic statistics, looking at one months worth of data can be very misleading, especially when you fail to put it in the wider context.

Looking at the monthly data nearly all the data was good news for the UK economy. Unemployment was down, employment was up and the number of people claiming benefits was down. This looked like a continuation of a very successful period of labour market expansion.

Nevertheless, these figures hide the variations caused by end of year demand for employment in financial services and Christmas employment in the retail and leisure sectors.

I would expect to see in first quarter of 2008 being a much less impressive year for the labour market. With retailers likely to have suffered a very tough Christmas, employment in these sectors is set to fall. The banks and other financial institutions are also expected to cut employment. Citi has already announced planned cuts of around 20,000 jobs worldwide - many of these are likely to be in London.

What is of a greater concern is that these figures may delay decisive action by the Bank of England. Today's release indicated a pick up in the rate of wage inflation, which in turn will stimulate general levels of inflation. As such, with the prospect of increased inflationary pressures, the Monetary Policy Committee may decide to be more cautious about cutting rates.

Today's data is likely to be one of the last bits of positive labour market news in 2008. Tougher times have already arrived for many people, the data will catch up in February and March to prove this.

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Wednesday, 29 August 2007

Sub-prime woes to hurt more than just the City Boys

To those who haven’t been around for the past couple of weeks the stock markets have been going through absolute turmoil. The fall out from the sub-prime lending market in the United States has had ramifications not only in the United States but across the global financial system. How long this crisis will last is yet to be seen and the wider outcome is yet to be known. However don’t be fooled into thinking this is not going to have an impact upon those outside the financial markets, it will.

To those who don’t know the current market turmoil has been created by a problem in the United States sub-prime mortgage market. The sub-prime mortgage market is where banks lend to people with a poor credit rating at a higher interest rate – in the hope of higher returns. However, the market became too loose and too overstretched. As base interest rates rose in the United States and the economy slowed, borrowers saw mortgage payments rise at a point when jobs were being cut and wage growth slowing. As a result defaults on mortgages increased rapidly.

So why didn’t the problem stop with the mortgage lenders? The problem has had wider consequences because those banks that lent in the sub-prime market packaged up some of this debt as a financial product and sold it to willing buyers in the international financial market. This was done as an insurance measure against widespread defaults. However, the selling of sub-prime mortgages went too far and rather than acting as an insurance against the risk, international financial markets have been pulled into the crisis.

The result is that financial markets have seen billions of dollars wiped off them in August. Several hedge funds have been closed and many of the major banks have suffered huge losses. This crisis has also led to a steep drop in confidence. Banks are no-longer willing to take the risk and lend to one another. As a result this has created a credit crunch where investors have not been able to borrow credit and as a result of a falling credit supply the cost of borrowing has risen rapidly. The Fed, the European Central Bank and other major banks have reacted strongly by cutting interest rates and by pumping credit into the markets. This has helped to temporarily stabilise markets but volatility remains high and no-one is yet saying things are in the clear.

Looking forward to the rest of the year and into 2008 it seems likely that the impact of the sub-prime market will run on and on in a number of different forms. Businesses are likely to find it increasingly difficult to find credit, especially the cheap credit they’ve been used to in recent years. This will reduce the ability of businesses to expand and capitalise on opportunities as and when they arise. Consequently business activity will be reduced, which will hit GDP growth.

The reduction in business activity will also hit employees. The first people hit are likely to be the City Boys who are not going to see the same bonus payments they have become used to. It has already been estimated that city bonuses may be reduced by up to 20 per cent in 2007. Jobs in financial services are also likely to suffer, with slowing headcount additions and even with a net loss of jobs.

However, with slowing business activity and reduced consumer demand from those working in financial services, the impact will be felt by every sector of the economy. There are few that will not be affected by the current financial crisis; jobs will be lost in all sectors. Those businesses which are not able to grow will not be able to increase the amount they spend on suppliers.

Those thinking that the sub-prime mortgage crisis is something that only those working in finance need worry about should think twice. Get ready for higher unemployment, slower wage growth and ultimately a difficult couple of years.

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Monday, 20 August 2007

Equity markets up for now

So it looks like the markets have steadied a little today following the decision by the Fed to lower the interest rate at which they lend to banks. However, given the limited improvements in equity markets today it is unlikely that the storm is over.

Expect more problems this week as more companies are forced to reveal the extent to which the subprime mortgage market and the subsequent market turmoil has hit various businesses.

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