Posts Tagged ‘uk economy’

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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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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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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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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Austerity and Property Prices

October 7th, 2009

This week we have heard the phrase “age of austerity” by George Osbourne at the Conservative Party Conference; in effect referring to a period of greater financial prudence as the UK reduces its budget deficit. So what will this mean for property prices?

Already announcements have been made to prune £7bn off the mountain of debt, but clearly there is much more to come. 

As yet no one has said that there will be job cuts in the public sector, but it seems impossible to achieve the savings required without job cuts.  Clearly higher unemployment is going to affect property prices.

Another subject not yet receiving much attention is tax increases.  The level of savings needed to reduce public debt are likely to require substantial increases in tax revenues, leaving us all with less money to spend.  Clearly such action is again going to impact on property prices.

Over the next few months each of the main political parties will unveil more details on how the budget deficit will be addressed, as they do it will become clearer on how we are all going to be affected, and in particular for this blog, how it will impact property prices.  

Visit our blog again later for further updates on the impact on UK property prices.

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Is a cap on bankers’ bonuses the right solution for our economy?

September 1st, 2009

There are alternatives ….

There seems to be an increasing number of politicians calling for a cap on bankers’ bonuses, is this because they believe it will ensure a more effective banking system for the British economy, or is this considered a popular statement to get votes?

Clearly it is in the UK’s interests for the banks to operate in a way that we do not have a repeat of the credit crunch, but a cap on bonuses is not the solution.  Bonuses must be based on performance, if a banker performs well they should be rewarded appropriately, simply applying a cap on bonuses will put a cap on performance.

Whilst some degree of regulation could help to ensure that bonuses reflect longer term (sustainable) performance an alternative approach is to make the consequences of bank failure high, very high.  

Right now we have a clear example.  The UK has invested huge amounts of taxpayer revenues into the banks.  What would hurt the banks is if the shares are sold back at the maximum profit the UK tax payer can make. Most banks are going to recover and will increasingly start to report large profits again, as a result their share prices will start to rise.  If the UK Government sells back those shares at only a small premium to what was paid for them then the banks have effectively been given a low interest loan! (which is a bit ironic in that they are not providing cheap mortgages). Alternatively if the UK Government holds onto those shares to benefit from selling at a significantly higher share price, then the cost to the banks will be much higher.

Another example.  Regulation could be established such that any bank deemed to have fallen into a category where there is a high risk of failure then penalties can be applied by selling part of the bank’s shares to the Government at a massively reduced price e.g. 10% of value. The cash received would restore the bank to a safe operating level, but the penalty paid by shareholders would be high, and the risk to shareholders would drive much safer bank operating practices.

Cleary the examples above are simplistic, but the underlying strategy is compelling, make the price of failure for banks high enough such that they will avoid failure. We must avoid a solution that caps banks performance to create middle of the road businesses that do not help to grow the UK economy.

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