Archive for the ‘UK Economy’ Category

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UK Energy Prices for Residential Properties

July 5th, 2011

It is great news to hear that forensic accountants are going to examine the wholesale purchase prices of energy to try and identify if consumers are getting a fair deal.  However is this really going to help?

Increasingly suppliers are using the tactic of what could be termed “price confusion” to lull consumers into paying more for their services or products.

Supply of energy, that is gas or electricity, should be quite easy to price.  There are peak periods and off peak periods, each has a tariff, and that should be it.  But not for our energy suppliers, they want to create as much confusion on pricing as possible so that can get consumers to pay more.

So suppliers introduce multiple tariffs; energy saver plus, online energy saver plus2, super saver gas plus electric, online energy saver3, etc, etc, etc, … you get the point. At the end of the day all of these “products” are the same thing, energy in the form of gas and electricity, energy does not vary  in colour, taste, weight, etc, its just energy, what is so complicated about that?

Then the consumer signs up to one of the many tariffs thinking they have a good deal.  Next month the suppliers say, hey, wait a minute, we have got lots of people signed up to our online energy saver plus2 tariff, so lets increase that one and make the others cheaper.

And so it goes on.  The suppliers of energy will make inflated margins until regulation is applied.

Maybe what we need is a single tariff, like a price for electricity and a price for gas, followed by an overall discount which they can vary from time to time at the supplier’s discretion.  This would make it much easier for consumers to select on price.  So how about it regulators?

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Posted in UK Economy, Uncategorised

The end of the Euro?

June 20th, 2011

It could be, at least according to Jack Straw’s comments in parliament today.  Some say the Jack Straw is being careless with his comments however there are also many who share his views.  So what is the situation and just how possible is the scenario of the Euro collapse?

The fundamental issue for the Euro, and in particular countries such as Greece, Ireland and Portugal, there is too much debt, there has been excessive spending and there needs to be a rebalancing.  Austerity is going to be around for a few years yet!

The problem comes when the markets, who are providing the funds for the debts, start to move toward the position where they feel the debt cannot be repaid.  When this happens the cost of debt soars to a point where the interest rate repayments cannot be met, and the only way out is restructuring the debt, in effect a debt write off. 

The markets are extremely wary of debt write off, if the tipping point is reached then the markets will pull out or at least push interest rates for the debt upwards.  This would be “unaffordable” for Greece, Ireland and Portugal.

But could the EU keep funding those countries in need? The reality is that the EU countries also need to borrow in the markets, and countries like Spain and Italy are also in a challenging situation for debt financing, if these where to be the next casualties the remaining EU countries would not have the resources to support them, and the EU would collapse.

Another option is to force Greece out of the Euro.  Whilst this might give some temporary relief for the Euro it then raises the question of how safe is the Euro in any country.  Will markets start to see some countries are a “safer” Euro investment than others?  If this was to happen it would also be the end of the Euro.

So going back to Jack Straw’s comments, maybe he is saying what many feel is a real possibility, but they simply cannot say for fear of making that possibility a certainty.

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Splitting banks retail and investment – a good thing?

June 15th, 2011

Whilst the full details have yet to be published it would appear that moves are underway to create a “division” between the retail and investment side of banks operating in the UK.

The retail side will manage deposits along with loans, mortgages, and related products for the UK consumer and businesses.  The investment side will contain the areas considered to be more risky such as trading on derivatives, etc.

This should reduce the risk for the retail side of banking however there are some who question whether the banks will be able to maintain an effective division between the retail and investment banking entities when they are managed and owned by the same company.

One of the negative factors being put forward by the banks is that the proposed changes could undermine lending and effectively make consumer creidt more difficult to obtain.  Clearly this is not a view shared by the Government as availability of sustainable credit is fundamental to economic growth. 

It will be interesting to see how this plays out.

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Posted in UK Economy

Public sector pensions to be cut?

March 10th, 2011

There has been much publicity about public sector pension with unions making increasing noises about strike action, public unrest, etc.  Is this really the case?

If we look at private pensions then people save into a fund, when they retire the fund pays out each year.  But as we live longer the fund has to stretch further and so the amount of pension paid out each year will fall.

If we look at public sector it is very different.  Irrespective of living longer the fund keeps paying out, so this means the fund has to increase in line with increased life expectancy.

If we take another view on this.  Someone retiring at 65 years of age in the 1970s might expect to have an average of 15 years retirement.  But we now live much longer, so someone retiring in the 2020s might expect to have an average of 30 years retirement.

For the public sector pension this means that the fund has to increase by 100% to cover the increase in life expectancy. 

As the growth in life expectancy is continuing then it is clear that public sector pension funds would have to increase to maintain the same pension.  Quite simply this is not sustainable, it is unaffordable and it must change.

The unions should stop harping on about “pension cuts”, what we need is a “pension cap” to stop the public sector pension growing to a level we simply cannot afford.  And the unions should stop complaining about the bankers, whilst many agree they are overpaid the UK can do little, we need the international community to take action, otherwise banks will move to which ever country is the most friendly and UK will lose the tax revenues, and then we really will need a public sector pension cut!

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Lybia – impact on UK economy

February 22nd, 2011

As the public desire for change spreads across the Middle East region there is increasing concern published in the media about what this could mean for oil prices and the western economies.

In some ways such views are perhaps a little selfish, those who are truly suffering are the populations of the Middle East countries where repression is backed with violence.  But then equally there is a responsibility on those countries that produce the world’s oil to ensure the supplies are maintained. 

So what is the impact on the UK economy?  The main impact is inflation, any increase in oil prices will impact not only fuel prices, but also the supply of commodities, food, goods and services of which the vast majority depend on oil for transportation and in some cases production.

The consequences of higher inflation could be severe by bringing forward interest rate rises that in turn will restrict economic growth and possibly push the UK back into recession.

Clearly all of this is hypothesis, it is by no means certain the the current Middle East turmoil will become protracted and impact oil prices long term.  In fact there is a possibility that once the current turmoil subsides those countries affected will seek to increase oil exports to improve their economies, and any increase in oil supply will reduce the price of oil.

It will be interesting to see how this plays out in the next few months.

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Bank tax levy increased to £2.5 billion on a permanent basis

February 8th, 2011

The new £2.5 billion bank tax levy ….whilst this is good for the British taxpayer there are still questions about the support given to banks and how those banks pay for the support received.

No country can implement unilateral sanctions against the banks such as “capping bonuses” without risking those banks relocating to another country.  But clearly something has to be done to address the imbalance where in good times a bank creates vast profits for its executives and shareholders, and in bad times they get a safety net from the tax payer.

But there has to be a way, a way in which banks cannot rely on a tax payer safety net without there being huge financial consequences for them.  Perhaps only then will the banking system operate in a more risk adverse way so as to avoid melt down knowing that such a situation carries huge financial penalties.

As to banks lending to small and medium businesses this is a very difficult issue.  It is very difficult to force any bank to lend to a business that is considered a high risk, otherwise we end up back where we started, that is bad loans causing banks to fail.  But equally there has to be more focus on business lending, not all businesses are high risk.  Maybe one of the big issues for banks is the regulation now being applied for them to increase liquidity, such regulation is effectively a “brake” being applied to all lending.

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Egypt – the economic ripples and how they may affect UK economy

January 31st, 2011

It is almost classic chaos theory, riots in the street in one country such as Egypt can affect the price of houses in UK.  Seems strange but it really is possible, here is why.

Instability in Egypt affects the Middle East region and in turn this could affect oil prices.  Already the ripples are being seen in the currency markets as currency traders and investors mark down the higher risk currencies.  If investors see a threat to future oil prices then prices will most likely increase.

Any increase in oil prices will impact economies and in particular the UK economy which is already experiencing an inflation upturn.  If UK inflation increases too far then the pressure on the Bank of England to raise base rates will grow.  And with increased interest rates it will make the cost of house purchase higher, thus impacting on UK property prices.

So far we have just used the oil example, but other commodities are at risk of price increases, one major example is wheat prices.  Any increases in commodities will again feed into higher inflation.

The bottom line is the stability in Egypt and the Middle East is key for the UK economy, and most especially whilst the UK is experiencing its own domestic issues due to the extraordinarily high level of national debt.

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Banks may be split up?

January 22nd, 2011

There are reports that the UK independent commission reviewing the banking system is now considering not only the splitting up of banks but also the separation of retail and investment banking – the latter of which we think is a great idea!

As a consumer when you put money in a deposit account you get a modest rate of interest in return for your low risk deposit, and when you put money into an investment scheme you potentially get  a high rate of interest and with it much more risk.  But here is the oddity, the banks can take your low interest deposit money and then invest that money at higher risk, they make increased profit on the margin, and if it goes wrong you potentially lose your deposit or the tax payer ends up paying compensation.  Surely this is wrong and the banking system has to be changed, low risk deposit accounts should be just that, low risk.

Of course this example is an over simplification, but it highlights the risks the ordinary deposit account holders take, along with the tax payer as guarantor, for any adverse risky investment decisions taken by the “investment arm” of a bank.

Lets hope the bank commission comes up with a solution that protects the consumer and tax payer, but at the same time does not cause the banks to relocate overseas … whatever action is taken needs to have an international dimension to ensure there is a level playing field.

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Bank base rate projection for 2011 and 2012

January 13th, 2011

We have reviewed comments from many of the UK’s leading businesses and economists to try and determine the consolidated view for bank base rates in 2011 and 2012.

The historically low bank base rates of been of great benefit to borrowers and in particular those with loans and mortgages that track bank base rate (BBR).  The low BBR means that many consumers have more to spend due to lower cost of borrowing, this is a key consideration as the Government fiscal squeeze starts to have greater impact in 2011.

Most of the experts are pointing toward an increase in the latter part of 2011, probably in Q4, 2011.  The size of this increase seems to be around 0.25% to 0.5% based on the views of the majority of reports and comments we have read.

A key consideration is that any increase does not cause the economy to go back into recession.  Another factor is that wage inflation needs to be held back, should it start to rise significantly then BBR may have to increase further to counter inflationary effects.

Moving into 2012 many of the experts see some further increases (few mention figures) and give the indication that by the end of 2012 BBR will still be well below the historical norm.  This would suggest BBR perhaps at no more than 2% by end of 2012?  As we say, few are willing to mention specific figures as there are too many variables, the 2% figure is therefore difficult to forecast with any confidence.

Interestingly we found many experts of the opinion that lower BBR will be a factor for a considerable period, possibly another 3 or maybe 4 years.  Forecasting this far out is increasingly difficult but this must be good news for those with mortgages.

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The medicine needed for the UK economy?

April 24th, 2010

Almost everyone agrees that the UK economy is in a very poor state, the problem is that our political parties cannot agree, at least in public, on the measures needed to get recovery going for the longer term.

Within 5 years the UK debt is forecasted to grow to £1.4 trillion, that is a staggering 1400 billion pounds.  Reducing debt can only be done through increasing income (eg tax revenues) or reducing expenditure (eg cuts in public spending), or a combination of both.

For an income approach the dilemma is this, if you focus only on the income side, that is raising taxes, it will effectively choke off the economy as the burden of huge tax increases will impact employment and spending, and if unemployment increases too much it will effectively reduce taxable income and worse still increase public spending on unemployment benefits.

For a spending cuts approach, again too much focus will have a negative impact.  Cuts in spending will ultimately lead to cuts in employment and in turn cuts in income from tax revenues. 

Clearly a balanced approach is needed, that is focus on BOTH spending cuts and tax increases.  There are no easy choices here but some thoughts are:

1 – Raise VAT by 2.5%, this will raise over £10 billion per year.

2 – Cut wasted spending, but focus more on spending that has less impact on UK employment.  Examples may be projects such national ID cards.

3 –  Provide greater encouragement for people to go out to work by reducing benefits paid.  There are many opportunities with almost 6 million “economically” inactive people being supported on benefits.

Clearly these are just simplistic headings but getting the economy back on track is about combined measures of increasing taxes and cutting expenditure in a way that is sustainable so as not to push the economy back into recession.

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