Archive for the ‘UK Economy’ Category

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UK national debt is at very dangerous levels

March 25th, 2010

In recent months all of our politicians have failed to really grasp the nettle and really outline the size of UK’s debt and how it is going to be addressed.

The figure revealed in the details of the March 2010 budget (not given airtime in the House of Commons) is £1.4 trillion.  That is 1,400 x £1 billion, or 1.4 million x £1 million.  It is a huge amount of debt.

Look at it another way, we currently have approximately 27 million people working and paying taxes.  The £1.4 trillion debt equates to almost £52,000 for every one of those 27 million tax payers.

Somehow the UK Government has to deal with the vast debt, somehow we, the British public, are going to pay off this debt through a combination of tax increases and cuts in services. 

Lets assume that the UK national debt is not cut and we stay at £1.4 trillion.  Today the interest rates are low, but it may be reasonable to assume in a few years time we could be paying as much as 5% on this debt, that would mean annual interest payments of £70 billion.

Prior to the credit crunch the UK was borrowing at a rate of less than £50 billion a year to fund the budget deficit.  So in “good times” we might assume we only need to borrow £50 billion a year.  But if we now add the possible annual interest of this vast £1.4 trillion debt we will need to borrow an additional £70 million a year, giving a total of £120 million a year including the annual budget deficit.

These figures are unworkable, unless the UK national debt is cut we could have a prolonged period of economic turmoil.  Whoever gets elected lets hope this issue of cutting UK’s debt gets more attention.

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The UK economy and strikes

March 23rd, 2010

Following the high profile campaign of Unite in its conflict with British Airways there are now other companies including British Gas where the threat of strikes loom.

What is it with the union culture, are they led by egotistical union management who like to flex their muscles and show their membership that they are worth their vast wages? 

Or maybe there really is unfairness on part of the companies such as British Airways in their treatment of staff?

A straw pole of people we have spoken with suggest that the majority of people do not support the strikers who in many cases are very well paid, not forgetting the 4 million plus “economically inactive” people of working age who do not have a job.

In today’s world of employment legislation to protect the worker, and the increased flexibility for people to move jobs, do we really need unions to “fight the cause” of the worker? Moreover should such workers going on strike have the right to disrupt the lives of other hard working individuals through what some might see as a selfish action?

Jobs for life are no more, the vast majority of the working population will change jobs several times during their careers, so do we really need a protectionist and outdated union culture to stand up for “the worker”?

Going back to the specific case of British Airways.  The industry is hugely competitive and has undergone major change with the increase in low cost flights, it is clear the British Airways has to change its cost base, and sadly that will mean some redundancies, changes to working practices, etc.  Simply going on strike, disrupting the lives of many ordinary people and damaging the UK economy does not seem to be a sensible approach. 

To make matters worse our political system is affected by those who “sponsor” parties through “political donations”, as such the recipients of the donations are not in a position to act without bias against the hands that feed them – in this case the unions.

Lets hope common sense will soon prevail, if not the unions will gradually sink the British economy.

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Reducing the UKs national debt, we have the answer!

February 15th, 2010

Well, maybe not quite THE answer but we have some thoughts and ideas on this subject.

Firstly there is pretty much a unanimous view amongst the major political parties that we have to reduce national debt.  But equally there is also a consensus that we cannot reduce debt too quickly such that we enter into a situation where we plunge the economy into the deep and prolonged recession (or depression).

In effect it is a balancing act, how do we reduce national debt quickly enough without creating a prolonged recession?  There is no easy answer to this, otherwise our politicians would be less reticent about giving us clear information on how they intend to deal with the UK’s debt problems.

Well, as we don’t have to stand for election it is probably easier for the editors at the house4sale blog to make some comments and suggestions, and who knows we might even spark some ideas for our political masters … ok, maybe we are getting a little carried away :-)

So here are 5 suggestions:

1 – Increase taxes on those areas that are less harmful to the UK economy. For example, tax goods where there is a very high percentage of imports, white goods, plasma TVs and the like may fall into this category.  This isn’t an import duty, this is an additional tax on sales that targets a product category, thus increasing tax revenues without contravening international trade conventions.

2 – Reduce final salary pension commitments in the public sector.  Whilst we feel it would be unfair to reduce payments for those already receiving pensions maybe increasing focus on those who have not yet retired is to be considered.

3 – Increase the retirement age immediately, maybe not making it compulsory for the next 5 years but at least giving people the opportunity to choose to keep on working. 

4 – Stop funding university places for degrees that do not improve the economy.  For example do we really need degree courses in wind surfing? And just how many degree courses in media studies should the tax payer fund?

5 – Cut back on benefits.  According to Government statistics we have over 8 million people of working age that are “economically inactive”, this compares with 28 million employed.  To put it another way over 1 in 5 people of working age are potentially claiming benefits. Every £1000 per person saved in benefits equates to £8 billion p.a.

Some of these are tough measures, but we have to take tough decisions if we are to at least maintain future living standards. Taking no action is not an option.

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UK’s credit rating expected to remain at AAA

February 10th, 2010

Today the Governor of the Bank of England, Mervyn King, announced that inflation may exceed 3% in the short term but will quickly drop back to less than 2%.  The main reason for this was the recent increase in VAT.

Mervyn King also added that the recovery in the UK economy will be slower than some had originally been forecasting.  He also went on to discuss UK’s AAA credit rating and saw no reason why this should change, but his speech contained a caveat regarding the election and what a future Government may seek to do.  In Mervyn King’s words, the AAA rating was ours to lose.

So why is the AAA rating so important to the UK economy?  There are two key and related factors here.

Firstly, the cost of UK borrowing would increase substantially if the credit rating was to fall below AAA.  Put simply the higher the perceived risk the higher the interest rate on borrowing.

Secondly, and perhaps more importantly, the effect of a fall in UK’s AAA credit rating would increase interest rates.  Higher interest rates, especially at a time of weak economic growth would slow the growth down even further and quite possibly create a longer recession.

So, it is good news to hear that UK’s AAA rating is “ours to lose”, let’s hope whoever gets elected looks after our credit rating!

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Double dip recession or sustained but slow recovery?

January 30th, 2010

These are the two most probably outcomes for the UK economy over the next few years with many economists taking the view of a double dip recession or prolonged slow growth.

The key issue for the UK is the size of the national debt which has to be cut substantially in the next 5 years (or sooner).  Failure to cut debt will increase the UK’s risk rating in markets, resulting in higher borrowing costs for the Government and a weakening of the currency.

The IMF have recently stated that the “biggest problem” facing recovery is the size of state debt, and that some countries may take up to 7 years for debt levels to be reduced to a more manageable level. 

One of the recent countries in the news is Greece with national debt as a proportion of GDP even higher than the UK.  The problem for Greece is an interesting one, as a full member of the Euro it has much tighter conditions to comply with.   So far Greece has outlined a plan to halve the country’s debts in 2-3 years, some feel this may not be achievable.

Back to the UK, the added complexity is the pending election.  Right now the UK is stalling on decisions to cut debt, the dilemma for the Government is the (perhaps) negative voter reaction when faced with substantial cuts and job losses.

This last point we have blogged about earlier, cutting back on jobs, which may well be needed in the public sector, will have an adverse effect on short to medium term economic growth.  As we pull money out of the economy it is only logical that this will create a downward pressure on the economy.

So, double dip recession or prolonged slow growth? Our view here is that the economy will dip briefly back into recession as the effects of budget cuts unwind.  All will become much clearer after the pending election and decisions taken to cut the budget deficit.

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Unemployment falls but are we heading for a double dip recession?

January 20th, 2010

Recent date published identifies falls in unemployment of around 7000 at the end  of 2009, but is this a statistical blip, or is it at trend?

One of the theories being discussed is the drop in unemployment is due to a seasonal increase in part time employment often seen around the Christmas period peak retail sales. We will know for sure when the February figures are published (post new year sales, retailers tend to slow down).

The key question for most people is what about 2010?  Recent indications form the Bank of England suggest that markets are becoming concerned about action to reduce UK debts.  The strategy proposed by labour is to halve the deficit in 4 years, but is seems the “markets” are indicating much faster cuts in the deficit are required.  So what does this mean for the economy?

The key factor will be the balance between sufficiently aggressive cuts to ensure we do not have pressure on sterling, but equally not too aggressive such that we thrust the economy back into a recession.

The bottom line is no one can be certain, however it is a possibility that we could have a double dip recession.  Lets hope that whoever gets elected gets the balance just right!

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Unexpected inflation could lead to interest rates increases

January 19th, 2010

The CPI figure for December 2009 was 2.9%, much higher than expected leaving many question marks about the continuation of low bank base rates.

The 2.9% figure was partly due to unchanged fuel prices and less retailer discounts on the high street.  The big question is what will January 2010 bring?  With VAT now back up to 17.5% from 15% in December this alone could push CPI above the bank’s CPI target of 2% inflation.

Any prolonged period of inflation will put pressure on the Bank of England to raise base rates from their historic low of 0.5% much sooner than analysts had previously been predicting.

As 2010 is set to be the year when everyone will start to feel the effects of substantial budget cuts the last thing the economy needs is higher interest rates at a time when jobs are being lost.  The real danger is stagflation, where interest rates increase while the economy falls (back) into recession.  Stagflation would have very serious long term consequences and is really the last thing we need.

The coming months are going to be very interesting, key points will be:

  • Economic growth (or not) for Q1, 2010
  • CPI growth in Q1
  • Announcements on where budget cuts will be targeted – expected after the general election in Q2, 2010.

On the subject of budget cuts there is a growing concern that these will hit public services and as a result those towns and cities which have a greater local economy reliance on public sector employment.  If you are looking to invest in property it would be wise to research local economic dependencies before choosing to buy.

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The property market in 2010

January 11th, 2010

It is going to be an interesting year, over the coming months the political parties will unveil their budget plans, and then there will be a general election, following which some of the market uncertainty will start to unfold. Only then will there be some clearer views on what this could mean for property prices.

There are many factors at play.  Firstly we could see unemployment remain high for a prolonged period should there be significant cuts in public sector.  There is almost certainly going to be higher taxation, depending on the levels of tax and where it is targeted it could significantly reduce the disposable income per capita. Such actions will naturally feed into the property market.

As we blogged earlier, there is the current false property market where lack of supply exists in part due to a large number of people being on very low interest rates, unable to move property as new mortgages would be on higher rates.  This effect will unwind itself as banks start to increase their SVRs (we blogged earlier, this looks highly likely in 2010).

The bottom line is that the property market in 2010 is going to be volatile, a key fundamental will be the new Government and the action it takes to deal with the current economic problems.

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TOP 5 INVESTMENT TIPS FOR THE NEXT 10 YEARS?

December 17th, 2009

A survey of investment advisors carried out by the Sunday Times has identified areas of investment opportunity for the next 10 years – and property is not one of them!

The survey identified the following (not in order of priority):

Emerging Markets – Population growth is expected to realise a 50% increase in the next 40 years, with this there will be huge growth opportunities for investment in countries expected to see the greatest population increases; such as Brazil, Russia, China and India.

Healthcare – This is a demographic time bomb due to aging populations in many western countries. Healthcare services and products targeted at the aging population is considered a high growth area.

Agriculture – It goes without saying, the global population growth will have a huge effect on agriculture ranging from the cost of food production through to technologies related to food production.

Energy – Again the impact of population growth will increase demand for energy. Everything from energy production through to energy saving technologies will become far more attractive for long term investment.

Green Technology – The increasing focus on environment and carbon emissions will drive greater investment opportunities in technologies related to this area.

So why is property investment not in this list? Maybe because those surveyed did not see property as a high growth area for the next 10 years. That said with the forecasted growth in population there will be an increased demand for property, and in particular areas where land for new build is in short supply.

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Bank bonuses and windfall taxes

December 8th, 2009

It is a hugely emotive subject, after vast sums of tax payer’s money being used to prop up major banks such as RBS and Lloyds TSB, people are understandably asking why are these banks paying out such large bonuses?

It is particularly galling to those who have lost their jobs and a struggling to repay mortgages under the threat of repossession from these banks. Overall it is a real mess, morally such huge bonuses should not be paid whilst so much tax payer money is being used to support these banks. But maybe we have no choice but to pay these bonuses?

The problem is that the banking system is global, if UK banks do not pay the bonus to staff that other non UK banks offer then they will lose many of their staff to the competitors, ultimately it could see a big fall in the banking sector within UK and ultimately a fall in tax revenues.

So what is the solution? Maybe we are too focused on the symptoms and not the cause, the bonus payments are just a symptom of an underlying banking system that needs to be “cured”. As we stated in an earlier blog about bank bonuses, the focus must be more on making the cost of bank failure high to the share holders.

If the cost of failure is high enough then shareholders would prevent banks from taking excessive risks. If banks perform in a way that is risk free to a country’s economy then they should be free to pay whatever bonuses their shareholders agree to.

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