November 28, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

This time it’s Gordon Brown’s own figures that could spell his downfall. The ITEM Club, which is sponsored by Ernst and Young, and reminds us, every time it issues a press release, that it’s the only independent economic forecasting ground to use the same model as the Treasury, has been doing some more number crunching. Its conclusion: despite Gordon playing with figures, statistics and definitions to his hearts content, he is still going to fail to meet his golden rule in this economic cycle.

Just to remind you, the statisticians have been coming to the aid of our chancellor for some time, and it would appear, he has been nudging them along even further. First of all, when talk first started that actually government spending on current account items could end up being bigger than income, Mr Brown said “no, you’ve misunderstood.” He said that actually, when looking at the current account budget over the course of an economic cycle, what matters is not the total level of expenditure, but how it relates to GDP. This is significant because we were in surplus during the early years of this cycle. As a result we will require a higher deficit in the latter years to counteract this initial surplus as a percentage of GDP than under the original system which just looks at the money spent and saved.

Despite this change, the ever-escalating level of government spending meant that very soon, commentators were once again warning the golden rule was in danger. But the Office of National Statistics came to Gordon’s aid, and said expenditure on road maintenance had wrongly been classified as a current account item and suddenly, our current account spending was a lot lower than had previously been stated.

And than once again, it looked as if even this revision would not be enough to save our chancellor’s blushes. This time it turned out that the timing of the economic cycle was wrong. And Mr Brown said that actually, on thinking about it, the current economic cycle began in 1997, not 1999. His precious golden rule was therefore safe, and Gordon would balance the current account books over the course of the cycle.

But now the Item club has said that even after this latest change to the parameters, we will still be in deficit.

The government has not got a good record for estimating its own expenditure and has consistently spent more than it predicted. But even if we allow the benefit of the doubt, and assume that this time the government has correctly estimated its future expenditure, the Item club reckons it’s still got its sums wrong. And has identified two problem areas.

Firstly there’s corporation tax. The government has assumed income from oil receipts will be up - not unreasonably as the price of oil is so high, but should also have assumed that corporate profits would be down, because of the hit our companies are taking on oil. But in fact the government has not done so, effectively only taking into account the positive effects of the high priced oil.

Secondly, the government has assumed that VAT receipts this year will increase 5.5%. In years gone by that might have been a safe assumption, but there’s this thing called a retail slowdown hitting the High Street right now. As a result VAT is bound to be lower than expected. The government appears to have made little allowance for the High Street’s problems

In total the ITEM club predicts a government deficit of £5.6bn worse than the government has predicted for this financial year.

As for the economic cycle, it believes we will hit a cumulate deficit next year, and that it will then get worse in the two subsequent years.

The implication of all this: taxes will have to rise, making it harder for the UK to move out of the economic downturn.

It does seem that the chancellor is running out of reasons to change the ground rules and that sooner or later he will have to admit that the golden rule he invented will be broken.

On the other hand, as we have said before, our deficit might be worse than Gordon predicted. The golden rule, which Gordon himself has attached so much importance to might be broken, but in relative terms the deficit is not that high. It’s worse in the US and in most of the major EU economies. In a historical perspective, it’s not so bad either.

Mr Brown may be forced to lick his wounds, but don’t forget, they are self-inflicted.

November 25, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

Those two mighty economies of the ’80s, who caught a cold, which turned into pneumonia in the ’90s, leaving them coughing and spluttering their way into the new millennium, might at last be clawing their way back.

In Germany, economic growth has been steady. Figures released earlier this week showed that the economy grew at 0.6% in the third quarter. At the same time business confidence is apparently close to its highest level since January 2001.

The Ifo business confidence index actually fell slightly in November, but that was due to an unusually good performance in October which saw the index hit its highest level. Despite the November fall, October was the second best month for the index in over 50 months.

Now, the prognosis is for a continuation of a “moderate” recovery.

Meanwhile analysts in the economy of the rising sun were celebrating a possible return of inflation. That might seem an odd thing to be so happy about but in Japan, falling prices have been the curse of the economy for a long time.

Actually it’s not quite that clear cut. The core consumer price index was at the same level as the month before, but CPI inflation after taking into account food prices did actually fall. Even so it’s the first time the consumer price index has been unchanged for five months, and the signs are that this could become a more regular occurrence.

The rate of interest in Japan is still zero, and is likely to stay at that level for some time

November 25, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

According to a report on CNN Money this morning, the new Xbox, which was released in the US earlier this week and retails for $399, costs $552.27 to make.

Apparently, the IBM chip which sits at the heart of the machine costs $106 alone, while the graphics processing unit costs another $141. In all, the cost of components comes in at nearly half as much again more than the retail price.

While that represents a hefty loss, the total loss per sales is even more. Microsoft’s share of the retail price will probably be around 80%.

Games console companies typically make money on the software, and subsidising hardware turning it into a kind of Trojan horse is a common marketing practice, and partly explains why software is so expensive.

Over time, the component costs will fall too. Microsoft expects to sell 5.5 million units in the US by June, and no doubt, sales will ultimately approach or even exceed 100 million units. That represents an opportunity to exploit economies of scale that will lead to a rapid reduction in component cost.

Moral of the story, unless you have backing worth billions don’t bother to launch a games console!

November 25, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

Of course, our chancellor didn’t actually say that the answer to the pension crisis lies in making things more complex, but that is the implication. He is after all notorious for using tinkering as a means of making tax ‘fair.’ But the current tax regime is horrendously complex, and has given rise to an army of bureaucrats calculating tax credits. After awarding benefits they are re-calculated, hitting millions of families with bills and condemning them to hardship, because the state paid them too much in the first place.

It’s perhaps the single biggest criticism aimed at the government: red tape it is argued is stifling enterprise. No wonder flat taxation is proving so popular in some quarters.

Now the debate over means testing versus one flat rate for all has hit the pensions industry.

Next week Lord Turner is due to announce the results of his three year study into the looming pensions crisis. It’s understood that the essence of his plan will entail a carrot and stick. The carrot: higher pension payments. In real terms state pensions have been steadily falling. In 1985 they equated to 22% of average earnings, today they’re worth just 15%. It is thought the Turner report will recommend rewinding this steady erosion, so that we are once more at the higher level of state pensions to average earning. How can this be funded? This is where the stick sets in: the sate pension won’t be paid out until we are 67.

But, the report is not even out yet and press reports today seem to suggest that Gordon Brown is already rubbishing it. He is talking about abolishing the link between state pensions and wages altogether, and means testing taking over from 2008.

Of course, Gordon is not the only one who dislikes the idea of extending the retirement age. The TUC believes that it is wrong that manual workers, for example, have to wait so long to enjoy their well deserved retirement.

Meanwhile the divide between Unions and management appeared to deepen yesterday, as the TUC published a report showing that company directors retire earlier than the people they employ.

The study looked at FTSE 100 companies and found that 80% of pension schemes allowed directors to retire at 60, without a reduction in their pension.

TUC general secretary Brendan Barber said “Britain’s boardrooms are secure in a pensions ivory tower. Top bosses can expect to live long retirements on luxury pensions that are far more generous than their employees can expect. They should stop lecturing the rest of us on how we should get smaller pensions from a higher retirement age.”

Speaking from the other end of the divide, CBI director general Sir Digby Jones has been having a go at the government again. Sir Digby, who always seems to have his name prefixed with words like angry and lambasted, has been telling the press in a round of interviews that the government has caved into union pressure, and that it should have extended the retirement age to 65 a long time ago.

It does seem that tears are unavoidable. We are living longer, we spend more time retired, our population will shrink, meaning lower growth and less people working to pay for those who are retired.

Carefully targeting the state pension at those who need it most must seem like a seductive alternative for Mr Brown. But the complexity he is introducing really is strangling Britain. The alternative: creating a more dynamic economy, moving away from the risk aversive nature that seems to be permeating society and especially the public sector these days. This would of course create more wealth, and leave more money in the coffers to throw at the pension crisis.

To steel a phrase from Tony Blair, there is a third way too. That method entails opening up the UK to wider immigration. But at a time when immigration is a dirty word, it seems unlikely any political party will recommend that as a solution to the problem of a falling size in the working population.

November 24, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

Internet shopping might be booming, and according to IMRG - its grown 2000% in the last five years, but if you are planning to buy goods over the net this Christmas, you’d better watch out. According to John Clare, Chief Executive of DSL, the company formerly known as Dixons, a lot of bargain hunters who buy goods over the net will be left with nothing, as a plethora of internet shopping firms go under. “It is going to be the weaker, medium-sized and smaller players that are vulnerable. I would be wary of buying from small independent operators,” he said. “You don’t know who they are, or even if you are going to get the product.”

Yet on the same day the Dixons boss was trying to persuade us to buy from companies you have already heard of, such as, well Dixons, - don’t forget PC WorLd is currently heavily promoting its web site - IMRG came out with its most bullish figures yet on the size of the Internet shopping market.

IMRG reckons that if all the companies who sell goods over the net were bricks and mortar shops, they would form a High Street 56 miles long. IMRG said yesterday “Twenty four million British shoppers will spend £5 billion online this Christmas, an average of £208 each, generating 130 million internet shopping deliveries.” And that constitutes a growth rate which is 130 times faster than the High Street.

The IMRG index, launched in 2000 with a weighted score of 100, passed 20000 last month, with clothing sales up 27% on the year. Electricals up 28% and beer/wine/spirits sales up 50%.

IMRG reckons that the new generation of electronic toys - iPods, mobile phones (such as the new O2 iMode product) and games consoles will be among their most popular products.

November 24, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

When Malcolm Glaser and his brood of Glasers bought up Manchester United, they concluded that it was unlikely Vodafone would exercise its termination clause in its shirt sponsorship deal with the club. The deal, which was worth £9mn a year had another two years to run, but yesterday the world’s leading mobile phone network company terminated the agreement with the world’s second richest football club.

Apparently the decision had nothing to do with the teams failure to come to grips with high flying and spending Chelsea; it had nothing to do with the departure of Roy Keane, not yet the loss of its status as the world’s richest club to Real Madrid; instead, Vodafone has just been able to go one better and agree a sponsorship deal with UEFA to endorse the European Champions League.

For Man U, it leaves a problem. With sponsorship already in place from Nike, Budweiser, Audi and Ladbrokes how is it going to find a replacement for Vodafone that is not a competitor with one of the other sponsors?

November 24, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

For the last few weeks the gas headlines have belonged to Sir Digby Jones of the CBI who has been warning that Britain faces the prospect of a 3-day week. The debate widened yesterday, with the government saying gas prices in the UK are amongst the lowest in Europe and that there will be no switch-off. But others warned the opposite, with Martin Temple, director-general of the Engineering Employers Federation saying the government was “in denial,” USwitch saying that gas prices were 44% cheaper in Latvia, while elsewhere it was argued that the high prices of gas in the UK would affect our exports.

On the government’s side, Alan Johnson, Secretary of State for Trade and Industry said “This is a winter when myself and the Energy Minister will be getting up every morning and if there is a frost we will worry. In future years we will not be so worried…Those that predicted the lights would go out this winter unnecessarily worried some very vulnerable and elderly people and that is not going to happen under any scenario whatsoever.”

The Energy Minister Malcolm Wicks was more bullish. He said the UK was “awash” with gas and talk of spot gas prices “was irrational.” Then Mr Wicks went into the politician-mode and speaking factually - but at the same time missing the point - said “The facts are that so far this winter there have been no gas shortages and supply and demand have remained in balance.” We say he misses the point simply because the troublesome period is ahead of us, and it really is irrelevant to talk about this winter so far - which actually seems to be about a week old.

On the other side, Mr Temple from the EEF had said of government statements, “Far from having the cheapest energy prices in the EU, UK companies are facing the highest gas prices. These remarks smack of complacency and we are now at the stage where we can only conclude that government is in denial over this issue and it is industry which is now paying the price.”

November 24, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

What has the Morrison takeover of Safeway got to do with the rate of interest? You could be forgiven for assuming “very little,” but actually it looks as if you would be wrong. Verdict research has identified what it calls the “Safeway” effect, and argues that the takeover could be a key factor in keeping prices down in the year ahead.

This morning Verdict published the results of a survey which predicts grocery prices will fall 0.6% next year, meaning 2006 will be the third successive year of falling grocery prices. In total 2006 will see £1.7bn knocked off the UK’s grocery bill, which will bring total saving since 2003 to £3bn.

And in its report, Verdict identified the “Safeway” effect as the more expensive (and upmarket) Safeway stores are integrated into the cheaper Morrison business. The last four Safeway stores are in fact disappearing under the Morrison name today. The Morrison Safeway merger hasn’t just hit prices in former Safeway stores. The Verdict report said “Though Morrison’s conversion program is essentially complete, consumer lag in switching means there will be a far larger proportion of customers up for grabs than usual. We therefore expect competition to intensify in the first half of 2006 and anticipate further price reductions.”

Tesco itself has predicted that its prices will be 2% lower next year, and Sainsbury says average prices in its stores will be 1.4% down.

It seems that as long at this fierce supermarket competition continues to bring down prices, CPI inflation too will stay largely in check, and any effect of higher fuel costs are likely to be counterbalanced by this, enabling the Bank of England to keep rates low, maybe even reduce them.

Talking of interest rates, the Bank of England revealed its minutes from its latest meeting yesterday. The vote to keep rates on hold earlier this month was unanimous. And MPC member David Walton, speaking on BBC Radio Ulster talked about a “steady course for interest rates at the moment.”

November 24, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

The move towards TV over mobile phones went up a gear yesterday as ITV and ‘3′ announced an agreement to show ITV shows over the ‘3′ network.

It’s not the first deal of its kind, but perhaps its the most interesting.

Earlier this month BSkyB announced a tie in with Vodafone, while ‘3′ had already signed up Channel 4.

But what makes the ITV deal significant, aside from the sheer popularity of programmes such as Coronation Street which will be available, is that some of the shows broadcast will be tailored specifically for the mobile market.

There will even be special sneak previews of ‘I’m a celebrity get me out here’ so that ‘3′ customers can get the latest ‘gen’ from the popular show before anyone else - and no doubt, when ‘3′ users travel by train, their fellow commuters will be able to share in the gossip too, whether they want to or not.

Some programmes will even run on non 3G mobile phones.

It’s understood that users will pay 50P per programme.

Bob Fuller, chief executive of 3 UK, said: “3 and ITV share the belief that TV will be a major driver of growth in 3G usage. The mobile phone is a natural extension of the television set and provides broadcasters with the potential to extend their terrestrial audiences and reach viewers on the move.”

Charles Allen, ITV chief executive, said: “This agreement with 3, the first deal we have signed of its type, allows us to talk directly to the company’s 3.2m customers and generate revenues from 3G-enhanced extras like streamed video and clips.”

The TV market for people on the move seems to be going mad. With the video iPod allowing users to download high profile programmes including Disney shows such as Desperate Housewives.

It’s a brave new world out there, converging technologies are opening up a gold mine, but perhaps its too early to tell who will benefit from this gold rush - although content producers are no doubt sitting pretty.

November 23, 2005 | posted by Michael Baxter in Uncategorized | comments (0) |

Over the last year, Easy-Jet flew 30million customers - 21% up on last year, and not far behind Ryanair, who flew 18 million passengers in the last six months.

Despite fuel costs rising by 50%, Europe’s largest budget airline announced a 9% rise in profits to £68mn.

It wasn’t just greater passenger numbers that were behind the rise in profits. The airline says it improved crew efficiency (perhaps they spent less time posing for TV reality documentaries) and reduced ground-handling costs. The new Airbus A319 helped too.

Easy-Jet boss Ray Webster, who is retiring next week to be replaced by former RAC boss Andy Harrison said, “In the past 10 years we have grown into an airline which carries 30 million passengers a year: a feat which took Ryanair twice the time to achieve.”

Ryanair recently announced £237mn euros profit after tax for the six months to 30 September 2005.