November 28, 2006 | posted by Michael Baxter in IABN | comments (0) |

We already knew she was a dove, but Bank of England Deputy governor, Rachel Lomax, has been cooing so loud this time that one can’t help the suspicion she was speaking up for more than just herself.

Ms Lomax was one of two Bank of England Monetary Policy members to vote against the rise in the rate of interest earlier this month, and yesterday she spoke out, saying: “There are still no real signs of pressure in the labour market.” Speaking at the CBI conference in Cardiff she added: “Taking out insurance against risks that don’t materialize can inject unnecessary volatility into the economy, with consequences for jobs as well as demand.”

The Bank of England dove explained her decision to vote for a rise in August by saying that at the time she thought there was a “quite significant” risk that wages would rise, and that back in the heady days of the summer the Bank thought there was a 50-50 chance inflation would exceed three percent. “Since August, the short and medium-term outlook for inflation have both improved somewhat,” she said, “as oil prices have fallen back very sharply and sterling has risen.”

Ms Lomax also said: “the faster growing labour force potentially raises the amount the economy can produce…Rather like raising the economy’s speed limit, it implies that it can grow faster without hitting supply constraints and generating inflationary pressure. That may be the situation right now.”

November 28, 2006 | posted by Michael Baxter in IABN | comments (0) |

The Centre of Economics and Business Research has released a note via its regular Forecast Eye Bulletin, outlining the reasons why it says house prices will never crash in the UK.

It says with “the ratio of house prices to incomes” increasing from 4.4 to 7.9 since 1996″, it is an easy and lazy argument to make that the house price inflation seen in recent years is driven by speculation. This argument is false, it says, for the following reasons.

” First, the United Kingdom does not have a large enough stock of houses. In 2005, 193,000 new houses were built - the highest in over fifteen years. In her housing review in 2003, Kate Barker said that to bring real house price growth down by a significant amount, the United Kingdom needs to build 245,000 houses every year. Government planning restrictions and schemes such as key worker housing, prevent the construction sector from fully responding to the house market’s price signal. ”
“Second, population growth - boosted because more of the world’s people want to live in the United Kingdom - and an ever smaller household size, means that there are more people who need to live in houses than ever before and, also, that more houses are needed per person.”
“Third, when thinking about buying a house, potential house buyers do not compare their income to the price of a house. Rather, they compare their income to their annual mortgage payments. With interest rates at or below 5.0 per cent in recent years, mortgages remain affordable when compared with the early 1990s. Although mortgage payments as a share of household income have risen from 15.0 per cent in 2001 to 19.6 per cent in 2005, they remain well below the 34 per cent recorded during the 1989 crash. ”
“Fourth, the new large and rich countries of the world - oil producing countries and the Asian dragons - remain happy to park their new found wealth in the world’s main financial centres: New York and London. A significant amount of money that flows in to the City of London, by one mode or another, ends up in the property market. ”
“Fifth, because of the nature of economic growth it is natural that certain areas of the country will see more economic activity as the economy expands. Because of lack of transport infrastructure, these growth areas are unable to geographically increase their labour catchment areas, meaning that more people need to live in certain locations - exacerbating the mismatch of supply and demand. ”

November 28, 2006 | posted by Michael Baxter in IABN | comments (0) |

As we move into the digital age, the UK’s favourite Auntie was beginning to look a little doddery. Still smarting over the Hutton report and the Greg Dyke affair, after a BBC’s correspondent so outrageously suggested government documentation on Weapons of Mass Destruction in Iraq were ’sexed up,’ one wondered whether the BBC had much of a future at all. As the digital age descends upon us, TV based media is set to, as HG Wells might have put it, ’swarm and multiply’. Was there a need for the BBC in this environment? But the chairman appointed in 2004, Michael Grade, seemed to come to the rescue. And today, the Auntie seems flushed with youth.

What a different story at the BEEB’s sorry rival. ITV is suffering at the hands of falling advertising revenue, growing competition from other broadcasters and growing competition for the TV medium as a whole, with a range of programming that sometimes seems lost in space, between ITV execs’ ears.
And so Michael Grade is set to join ITV, following in the footsteps of his father, who launched ITN back in the 50s.

Where that leads Sir Richard Branson and NTL is anyone’s guess. It’s no surprise ITV turned down the bid, with a card like that to be revealed, they would probably have turned down any bid.

In this era, however, as we have said before, content is king. And ultimately, ITV needs better content. Grade’s famous father was behind the TV series’ ‘The Persuaders’, ‘Danger Man’ and ‘The Saint’, and right now Mr Grade junior’s halo brings back memories of the character played so famously by Roger Moore.

With the Murdoch’s via BSkyB holding 20 percent, with Branson’s ambitions in the TV arena apparently unquenched, with BT launching their TV service soon, with the likes of Google moving into TV content, so that ITV, BBC and BSKyB can no longer say of the TV domain, “That’s my space,” ITV’s challenges have become incredibly complex.

The Grade appointment is a real coup, and hats off to ITV for pulling it off. But even Mr Grade faces a massive task. He may well pull it off, but we suspect ITV may need at least one more major merger before it can say it’s back.

November 28, 2006 | posted by Michael Baxter in IABN | comments (0) |

Reports on the economy have been so bullish of late that the comments made by retail analyst, Richard Ratner, of Seymour Pierce stockbrokers, came as something of a shock. “We now believe Christmas 2006 will be worse than 2005, and could be as difficult as, or even softer than 2004, which was the worst for 23 years,” he said yesterday.

It caused panic on the markets as shares in many retailers fell yesterday after the broker put out a note, entitled: “Teetering on the brink”, in which it quoted Mr Ratner as saying: “We wonder whether the pressure on the consumer from higher interest rates, levels of debt, council tax bills and other stealth taxes and fuel bills have begun hitting home?”

But its’ not bad for everyone. For the City’s retail guru said: “Some retailers, such as MS and John Lewis, are doing relatively well, as are the foodies.”

With the US economy expected to slow significantly next year, if the Ratner predictions prove prescient, then the UK will be fighting a slowdown on two fronts. It’s difficult to see how the property market will escape too. If retail suffers, you can be certain even more demand will leak out of the market for houses.

The UK will then become even more reliant on the burgeoning recovery in the Eurozone, and for the City to continue its miracle working.

November 27, 2006 | posted by Michael Baxter in IABN | comments (0) |

Last week was a traumatic period for the dollar. It all happened when US markets were asleep. Thanksgiving saw the US shut down for the day. Liquidity was therefore low, and the dollar saw big falls. In fact on Friday the dollar passed a milestone, falling to $1.30 to the euro, while sterling rose by one percent during the day, to $1.93. Commentators put the fall down to fears over the US economy, data showing the Eurozone is gaining strength, and a hint from a representative from China’s central bank that the economy behind The Great Wall may sell some of its holdings in dollars. But, all in all, none of these three reasons were considered to be especially new; there was no fundamentally good reason for the dollar to be so much lower on Friday than it was on Thursday. Many see this as evidence that the greenback is just weak, with the tiniest piece of flotsam or jetsam on the economic sea of data being enough to see a run on the currency. Given this, Capital Economics is predicting $1.4 to the euro soon, while the Sunday Times headlined on the front page of the business section “Pound set to hit $2.”

You can understand why the dollar is so precarious. Uncle’s Sam’s massive current account deficit, propagated by spending US consumers, was inevitably going to have an impact, and 2006 has been full of predictions of gloom for the currency. Warren Buffett, for example, said he planned to sell many of his US assets in favour of assets from overseas in anticipation of a falling dollar. But the question some have asked is this: If the greenback is dropping on the back of a poor balance of payments, why isn’t the pound falling too?

The answer is actually quite obvious, but lying within the whys and wherefores there is a mystery.

The UK may have a poor record in its balance of payments in recent years, but it is nowhere near as bad as the US, with the UK current account deficit in the region of two percent of GDP, compared to five or even six percent of GDP in the US. The mystery relates to why the UK deficit is not a good deal worse, because if you examine the facts, you would have thought the UK would have an even higher current account shortfall.

In recent years, the UK’s current account has benefited from a positive flow of investment income. We get more money in from investments than we fork out. This has helped to greatly reduce the overall deficit. Yet, and this is the puzzle, the value of investments abroad is actually lower than the value of investments held in the UK by overseas individuals and institutions. In short, we are making more money from less.

There is only one possible explanation for this strange phenomenon. It’s thought that foreigners are typically investing in UK bonds and other low risk forms of investments, perhaps encouraged by the UK’s relatively high rate of interest. With that low risk, yield is inevitably low too.

The UK, on the other hand, typically invests in equities and other more risky assets. And since it’s been an outstanding couple of years for equity investment, the economy has enjoyed much higher returns on its more modest investment. It’s as if Great Britain plc, or so the Bank of England has said, is like a bank or venture capitalist borrowing to invest in projects that earn a higher rate of return than the cost of funding.

But as any financial advisor would tell you, greater risk may mean that from time to time, you will enjoy a better reward, but sometimes the risk backfires. The same danger exists for the UK.

For 2007, the problem is this: 22 percent of the UK’s total overseas assets are invested
in the US. If the US economy slows next year, the way most expect, then the UK is likely to see a big fall in investment income, or so says Paul Dales from Capital Economics. He said that Capital Economics estimates that a US slowdown “could reduce the UK’s annual investment income surplus by anywhere up to 1.5% of GDP.” he added “This, in turn, could leave the sterling exchange rate looking fundamentally over-valued at current levels.”

Of course there’s another implied prediction in the Capital Economics theory: that as the US economy slows, then US equities will not perform as well as they have been. In other words, it is predicting, by inference, that US equities will have a bad year next year.

For further information

Dollar loses ground against euroBBC

Dollar Posts Longest Decline in Seven Months on Rate-Cut BetsBloomberg

November 27, 2006 | posted by Michael Baxter in IABN | comments (0) |

November saw shock waves hit the European Stock Exchange companies. Earlier in the month seven banks: Citigroup, Morgan Stanley, Goldman Sachs, Merrill Lynch, UBS , Credit Suisse and Deutsche Bank announced their plans to club together to offer a rival trading platform for shares across Europe. Then last week, ICAP, the world’s number one interdealer broker, hinted that it too was looking at trading shares independently of the stock exchanges, with many believing it could provide the technology for the banks in their venture to change the world of share trading.

But this weekend, the Sunday papers revealed that the LSE is planning to hit back. Apparently it is due to announce big reductions in the cost of share trading - watch this space.

November 27, 2006 | posted by Michael Baxter in IABN | comments (0) |

Talking of the Internet experience, Marks and Spencer has come top in a survey of twenty of the leading High Street retailers.

According to the survey, which was conducted by Webcredible, and looked at the web sites from retailers including Currys, Debenhams, Woolworths, WH Smith, Boots and the Early Learning Centre, Marks and Spencer scores best for user friendliness.

M S arch rivals, Next and Top Shop, on the other hand, were near the bottom of the pack.

Trenton Moss, director at Webcredible said: ” Independent research shows that as many as 83% of internet users leave a website because they can’t find what they are looking for…Our study threw up some real surprises - Top Shop doesn’t even provide a search function and, incredibly, the Clinton Cards website gives users the option to add products to their basket without actually letting them know how much they cost.”

November 27, 2006 | posted by Michael Baxter in IABN | comments (0) |

Forget about the rules of economics. The single biggest factor behind the current conditions of low inflation, booming China and India and productivity gains in the West, is new technology.

Moores Law is more important for explaining the current economy than any theory of Keynes of Freedman.
It may feel a little like an understatement, but the CBI has found that 56 percent of companies consider the Internet has had a ’substantial’ or ‘revolutionary’ impact on their industry.
As for the consumer; sixty percent say the Internet has given them more power and 43% believe that companies are becoming more accountable as a result of the new technology. Over 70% say they look at other consumers’ comments about products before making a purchase.

Richard Lambert, Director-General of the CBI said: ” Six years after the dot.com bubble burst, the Internet is driving really substantial change among businesses. Firms are learning more about harnessing the Internet to benefit their staff, their customers and their future prospects. Serious investment is going into new Internet technologies and this is set to increase.”

“But too many still feel their online activities don’t live up to the competition and firms are upfront about still having much to learn about how best to reach customers via the web. Businesses need to grasp the opportunities with both hands and make the Internet as central to their business as HR or finance - or they risk being left standing.”
“Businesses have already come a long way on the Internet journey. If there were such a thing as a digital base camp, they would have reached it. But their real ascent is still ahead of them, and much of the terrain is unknown.”

November 27, 2006 | posted by Michael Baxter in IABN | comments (0) |

Gordon Brown likes to take one of his Scottish hands, and use it to pat himself on his back. The UK economy is a flying success, he proclaims, and no doubt hopes he will be remembered as the greatest chancellor ever. But not everyone is in awe of this track record. Newspapers such as the Business or Telegraph engage in anti-Brown rhetoric even more often than Mr Brown praises his management of the economy. Their big gripe is with taxation and red tape. They say Mr Brown has created an economy that is seeing enterprise threatened by an ever more complex tax regime.

Now the CBI has joined the ranks of the government’s most vociferous critics. (A tad embarrassing perhaps, as Mr Brown will be attending the CBI conference this week).

The employers’ organisation has been surveying its members, and found that 10 percent of companies who responded to its questionnaire said they were considering moving their headquarters abroad and that seven in 10 companies believe the UK has become a poorer destination for business since 2001.

The CBI’s director general, Richard Lambert, said:” High business taxes are not a way of making ‘fat cats’ squeal. They are a burden carried by the whole of society…It is important to be absolutely clear about who pays for high business taxes. They fall on consumers, in the form of higher prices. They fall on shareholders, large numbers of whom represent the interests of pensioners and savers. And they fall on the workforce, in the form of fewer jobs, squeezed wages, and lower business investment.”
The CBI wants Corporation Tax cut from 30 percent to 25 percent, and for National Insurance contributions to be cut.

November 27, 2006 | posted by Michael Baxter in IABN | comments (0) |

Africa has got its fair share of natural resources, but the obvious natural phenomenon of Africa has not led to economic success. Africa is hot, with sun-dried soil creating tough conditions for agriculture. But the sun could prove the continents’ saviour, and rid the world from global warming to boot, or so suggests a report from the German Trans-Mediterranean Renewable Energy Cooperation.
Apparently, if we were to cover five percent of the world’s hot deserts with something called ‘concentrated solar power’ then we could meet the planet’s entire electricity needs. “Every year, each square kilometre of desert receives solar energy equivalent to 1.5 million barrels of oil. Multiplying by the area of deserts world-wide, this is nearly a thousand times the entire current energy consumption of the world.” said Dr Franz Trieb, Project Manager.
The technology has further benefits too, potentially creating the possibility of farming where once there was desert. A by product of the process of solar power is desalinated water which can be used to irrigate land near by, and the giant mirrors used to trap the sun’s energy provide shade.

“The cost of collecting solar thermal energy equivalent to one barrel of oil is about US$50 right now (already less than the current world price of oil) and is likely to come down to around US$20 in future,” added Dr Trieb.

The good doctor also said: “Contrary to what is commonly supposed, it is entirely feasible and cost-effective to transmit solar electricity over long distances. With modern high-voltage DC transmission lines (HVDC), only about 3% of the power is lost for each 1000 km. In round figures, this means that solar electricity could be imported from North Africa to London with only about 10% loss of power. This compares extremely favourably with the 50% to 70% of losses that have been accepted for many years in conventional coal-fired power stations.”

For further information
Power from desertsTrans-Mediterranean Renewable Energy Cooperation