March 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

First there was private equity, then talk emerged that Marks and Spencer was considering purchasing Sainsbury. Now the rumour mill has ground out talk that Asda has mooted throwing its hat into the ring.

If the two supermarkets were to merge, they would have a combined market share that is comparable to Tesco’s.

Clearly competition authorities are likely to raise their eyebrows at such a merger, but given that the resulting company will be no bigger than Tesco, can they really stop it? Rumour says Asda is discussing the possibility with the Office of Fair Trading.

When Morrison and Safeway merged, Morrison was forced to sell off some of the Safeway stores, with Waitrose seeming to be the main beneficiary.

Asda is, of course, owned by Wal-mart. Its parent company has deep pockets, but is suffering in the US, where it is so large it has limited scope for expansion. It even has a problem in the recruitment field, since a high percent of would-be potential employees have already worked for the company in the past.

But, while the line-up of suitors grows, Sainsbury itself continues its renaissance. It is now two thirds of the way thought its three-year recovery programme.

In the 12 weeks to March 24 like-for-like sales were up 5.9 percent, while chief exec Justin King reckons the company has now added £1.8 billion to turnover, thanks to the recovery programme.

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March 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

Do you remember the furore earlier this year over the economic impact of immigration? At the time Sir Andrew Green from Immigration Watch argued that immigration has little impact on GDP per capita in the UK.

Sir Andrew, who seemed to present himself as the voice of economic reason, said: “The much vaunted contribution of immigrants to the economy is very slight indeed#133;of course many immigrants make a useful contribution to the economy but taken in total the economic benefit is at best marginal. The main beneficiaries are the immigrants themselves who are able to send home about £10m a day, not the host nation.”
Don’t be surprised if the debate makes the news again this weekend. According to the National Institute of Economic and Social Research (NIESR), the UK and Ireland - the two countries that have seen the biggest influx of immigration in recent years - are both seeing strong economic gains as a result.
As for the future, NIESR reckons: “EU enlargement will serve to boost GDP per capita by a third of a percent in Ireland and by 0.2 per cent in the UK in the medium term, because the migrant population is predominantly of working age, resulting in more workers per person outside the labour force.” It also says: “Aggregate GDP will be 1.7 per cent higher in Ireland and 2/3 per cent higher in the UK in the medium term, as a result of immigration from EU enlargement.”

NIESR added: “Ireland and the UK have become popular destination countries for NMS workers, partly because of the liberal immigration policies adopted, and restrictive policies adopted elsewhere. Ireland in particular has experienced a large change in the number of NMS nationals present, measuring around 2.2 per cent of the working age population. The equivalent number for the UK is 0.7 per cent. In comparison, the Scandinavian countries that adopted reasonably liberal immigration policies towards NMS workers have seen significantly smaller changes in immigration, which may reflect language barriers.”

There are other advantages to immigration too. If Sir Andrew is right and many immigrants send money home, which boosts their economy of origin, this can be a good thing. It’s good if economies such as Poland grow, and eventually become potential consumers of British goods and services.

But while the NIESR data may lead to a resurgence of press on the subject, we somehow think it’s more likely the report will be ignored. The press tends to only jump when economists say immigration is bad for GDP.

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March 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

The are no prizes for guessing why, but oil soared yesterday, passing the $66 a barrel mark on the New York Mercantile Exchange. That is the highest level we have recorded since September last year.
It shows how influential Middle Eastern politics are on the price of oil, and if the British hostages are released in Iran, no doubt the price will fall back down again.

Stepping away from politics into the realm of economics, it is quite interesting to note the correlation between the price of oil and other economic indicators. When oil was high in price earlier last year and in 2005, the high street was performing badly, and as the black stuff started to fall, retail sales picked up.
You might, say, “so what?”, you would expect that. Well, if that is so, maybe you should tell the Bank of England, and other central banks.
When oil was high in price, and demand therefore constrained, the rate of interest was increased. And even today, many are saying the recent run of interest rate rises is just a problem of lag, while we wait for last year’s high fuel prices to drop out of the annual figures.
An increase in the price of products - such as oil - where demand is inelastic, is not necessarily inflationary. Sometimes, an increase in certain prices can lead to a fall in inflation.
Here are two examples of this.
Remember Margaret Thatcher? One of the first things she did was increase VAT, and yet, ultimately, this proved to be an anti inflationary measure.
Remember too that in the days when the retail price index was used as the main guide for inflation, an increase in the rate of interest immediately led to a rise in inflation because mortgage payments rose.
If you believe that actually, in the long term, inflation is caused by demand, then upping the rate of interest when oil is high in price is precisely the wrong thing to do.
In his book - The Death of Inflation - Roger Bootle argued that the growth in capacity created by the expanding economics of India and China has created spare capacity, and therefore inflation was dying.
But is it not the case, that China and India also create consumers? The price of corn has been rising of late, which is surely a sign of rising demand, (in part this is caused by the US government’s scientifically flawed belief that bio fuels are the solution to global warming) rather than constrained supply.

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March 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

The high street has had its best month since 2004, suggests data released yesterday by the CBI.

The CBI distributive trades survey is produced when retailers say whether sales are up or down on the same month the year before. The percentage balance forms the CBI index, which in March rose to 32, up from 19 the previous month. The last time the index was so high was December 2004.

We know what you are thinking. Sales were so bad last year, (the index was -16), that of course a year on year comparison would be good. But according to the CBI, the three-month moving average, which smooths out monthly peaks and troughs, was #43;27%, its highest since July 2004 (#43;39%).

Retailers linked to the housing sector did especially well - a balance of #43;53 percent of hardware, china and DIY retailers said volumes were up compared to a year ago. Also doing well were footwear and leather, but booksellers and stationers reported a slight fall in year-on-year sales. Motor traders also reported a fall in sales

John Longworth, executive director of Asda and chairman of the CBI’s DTS Panel, said: “Looking past the headline figure, it seems the housing market is the driving force behind much of the spending. There was strong growth in demand for hardware, DIY products and household goods, while furniture and carpets sales are also up on a year ago.”

Actually, it is a little strange. The rate of interest keeps going up, and yet sales seem unabated. The Bank of England will be making its next rate of interest decision soon, and a growing number of economists are saying this could be the time when rates go up again.

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March 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

Later today official figures are expected to reveal a fall in unemployment across the eurozone to 7.3 percent in February from 7.4 percent the month before. This will bring unemployment in the area down to its lowest level since 1993, when records charting the area began.

And looking forward the prognosis is good too. According to the National Institute of Economic and Social Research (NIESR), euro unemployment is set to fall to 7.2 percent during 2007, and then to just 6.8 percent in 2008.

To put this in context, unemployment in the UK is currently 4.7 percent, the second best figure in the EU.

And that slowly awakening economic giant, Germany, seems to be leading the charge downward. According to official German government figures, 65,000 fewer people were unemployed in March, which dragged the unemployment rate down to 9.2 percent for the month, the lowest level in six years.

And then there is France. Unemployment across the channel is down, way down, according to official figures, although analysts are sceptical.

The official data says French unemployment has fallen from 9.6 percent last year to 8.4 percent, taking it to a 24 year low. Furthermore, labour minister Jean-Louis Borloo said: “I am convinced we will be at 7.9% at the end of the year.”

But some believe the data is potentially flawed, so while it’s improving, maybe the outlook in France is not quite so rosy.

The two top stars of the EU economic scene though are Ireland and Luxembourg, where unemployment in 4.3 and 4.5 percent respectively. The UK and Netherlands are next, both with 4.7 percent, and the only other country where unemployment is below 5 percent is Denmark where it stands at 4.8 percent.

It’s all very good news, but inevitably, as the figures improve, inflationary pressure builds, and the promising data is likely to make future rate of interest rises that little bit more likely.

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March 29, 2007 | posted by Michael Baxter in IABN | comments (0) |

Sometimes, in economics, we forget what really counts. Economists drone on about the rate of interest, and fiscal policy and balance of payments, but forget that actually the factors that determine a country’s success are usually more dependent on the people living there, and how they are educated.

Take the Nordic countries. They focus on education and innovation, and guess what happens? They get richer.

In fact, according to the latest report from the World Economic Forum, Denmark is now the world’s top country for exploiting technology.

The World Economic Forum calls it network readiness. And Denmark seems to be benefiting from a healthy list of pluses. It’s one of those A1 reports - ‘A’ for effort and ‘one’ for achievement. Apparently, Denmark has a “clear government ICT vision” and an “early focus on ICT penetration and usage.” The Danes also have a “well-developed internal market, together with a continuous emphasis on education and RD and a talent for pioneering applications and technologies.” And it’s all this, says the report, that has: “laid the basis for the development of a first-league high-tech industry.”

But Denmark is not the only country up there in the north west corner of Europe that is doing nicely out of technology.

Sweden is in at number two, up from eighth spot last year, while Finland, Iceland and Norway are all in the top ten.

But, it’s bad news for the US. It has slipped from the number one spot last year, to seventh. Apparently this was mainly due to relative deterioration of the political and regulatory environment. “However,” says the World Economic Forum, the US: “maintains its primacy in innovation, driven by one of the world’s best tertiary education systems and its high degree of cooperation with the industry as well as by the extremely efficient market environment displayed.”

Third in the chart is Singapore, down one place from last year, while the UK occupies a lowly ninth spot - up one place from last year.

Eight of the top ten countries in the list are European, but the only G7 counties to make the top ten are the UK and the US. Germany is in 16th spot, and France 23rd.

But those two giants of the future, India and China are still getting that dreaded “must do better” comment. The report said: “India and China both show a downward trend, with India 4 positions down to 44th and China 9 positions down to 59th. Notwithstanding some specific clusters of ICT excellence in both countries, their performance overall in leveraging ICT for increased development appears to be particularly hindered by weak infrastructure, with a very low level of individual ICT usage for India and of individual and business readiness and usage for China.”

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March 29, 2007 | posted by Michael Baxter in IABN | comments (0) |

Do you remember the day the internet died? It’s like the words to that Don Mclean song, but, just as music turned out not to have died after all, it appears the internet was just pausing for breath, before it embarked on the most extraordinary growth story.

Back in 2001, internet advertising in the UK was worth £165 million, but according to data released yesterday, in 2006 it soared to just over £2 billion. Or so says the latest report from the Interactive Advertising Bureau and PricewaterhouseCoopers.

In the process it overtook advertising in national newspapers, which was worth just £1.9 billion, to become the UK’s second largest advertising medium. The growth has increased the internet’s share of all advertising revenues to 11.4 percent, up from 7.8 percent in 2005, and it is now half the size of the TV advertising market - which experienced a fall of 4.7 percent in 2006 to £3.9 billion.

In fact, internet advertising aside, the UK advertising market reduced in size last year by £466.1 million year-on-year, a 2.9 percent decline. However, with the increase in online advertising spend, the entire market grew by 1.1 percent.

By the second half of the year, the ‘net was doing even better, when expenditure topped £1.098 billion - a 12.4 percent share of total UK advertising. According to ZenithOptimedia, the UK now leads the world for share of advertising spend online as the global average is currently 5.8 percent.

Of late, the real star in the internet advertising world has been search engines, and 2006 was no exception, seeing 52 percent growth to £1.2 billion or a 57.8 percent share

But the year also saw classified advertising grow by 45 percent to £379 million, at a time when traditional classified advertising declined by 7.8 percent year-on-year.

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March 29, 2007 | posted by Michael Baxter in IABN | comments (0) |

Last week the Fed offered some hope. For month in month out the Fed repeatedly talked about the need for further policy firming. It hasn’t changed the rate of interest since last June, but in every meeting since it repeated its ‘policy firming’ warning. Then, when it met again last week, that phrase was omitted from its statement, and some people made much of this, saying this means then that rates will be heading down soon.

But yesterday, Ben Bernanke, chairman of the US Federal Reserve, seemed to dash that particular hope. But in the process, tried to reassure us all that we are worrying needlessly.

First he said: “I do want to emphasise we have not shifted away from an inflation bias,” and, with an inflationary hawkish tone, added, “The high level of resource utilisation remains an important upside risk to continued progress on reducing inflation.”

But then, despite the inflationary warnings, Mr Bernanke struck an optimistic note: “The economy appears likely to continue to expand at a moderate pace over the coming quarters,” he said. And, after turning his attention to the troubled sub-prime market, added: “At this juncture … the impact on the broader economy and financial markets of the problems in the sub-prime markets seems likely to be contained.”

Now Mr Bernanke likes to be considered something of a plain speaker. In this respect he differs from Alan Greenspan, who used to keep markets guessing and would speak in such subtle tones that economists found it quite difficult to interpret his words. This means that if Mr Greenspan was unsure of something, he was still able to present with an air of all seeing economic wisdom. If you like, he took a leaf out of the Ancient Greek oracle at Delphi: speak your prophecies in riddles, and the world thinks you know the future.

But when Mr Bernanke is not sure, he says so. This has led to charges of uncertainty, with some saying he is not as clever as the previous chairman.

The trouble with making your meaning clear is this: if you are wrong, your failings are there in the full light of public scrutiny.

And what Mr Bernanke is saying is quite different from what others are suggesting. Many, including Mr Greenspan, believe the US is in danger of hitting recession. They fear the US housing crisis could drag the economy down with it, and the big hope is that the Fed will lower rates and save the day. But there is one major dread; that the economy slows but the Fed is unable to lower rates because of the inflation dangers.

Mr Bernanke, in his wisdom, is saying the opposite; that rates won’t go down, that the economy is strong anyway. If he is right, good for him and good for Uncle Sam. If he is wrong, it’s a big mistake and one that no one will be able to ignore.
You may recall last month, when markets did that nasty slide, Alan Greenspan warned of a potential US recession. At the time he said: “When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign.” He clarified that statement later by saying he thought the chance of the US hitting recession soon was a third.
But then yesterday, Mr Bernanke said the opposite. “I would make a point, I think, which is important, which is there seems to be a sense that expansions die of old age, that after they reach a certain point, then they naturally begin to end#133;I don’t think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long.”
Now, of course, he may well be right, but if he’s wrong#133;..

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March 29, 2007 | posted by Michael Baxter in IABN | comments (0) |

Compare the US sub-prime market with the UK’s. The differences are so wide, you could drive a coaches and horses between them. But, then again, on further analysis, maybe the similarities are not so great after all.

You don’t need to be smart to understand the fundamental reason for the US crisis. The rate of interest rose from one percent to 5.25 percent in two years. Mortgages were offered to people on a two or three year fixed deal, at a rock bottom rate. But when this ended, the borrower had to pay the market rate. To rub salt into the wound, for many, this was now five times higher than the level when they took out the loan.

In the UK, by contrast, rates have merely risen from a low of 3.5 percent to the 5.25 percent we have today.

Besides, in the US, the rate of interest was one percent for 30 months, in the UK rates were less than four percent for just nine months

There are further differences too. In the US, evidence suggests that brokers were, how can we put it, extremely enthusiastic in selling the loans. It’s been suggested applicants were encouraged to lie about their income. Perhaps we can do no better than give an idea of how extreme the US sub-prime market had become by describing a loan known as ‘negative amortisation mortgage’. It’s a grand phrase to describe a reckless offer. For this type of loan, made available in the US recently, the initial payments didn’t even cover the interest on the debt. No wonder, when this initial, introductory period came to an end, crisis descended like a brick from the sky.

According to Capital Economics, at peak, 29 percent of all US mortgages were for at least 100 percent of the value of the property being mortgaged.

So it really does seem as if the US sub-prime crisis was a disaster in waiting.

It seems that another problem in the US is this: many sub-prime borrowers thought that if they ran into difficulties when their introductory period ended, then they could simply take out a new mortgage, with a new introductory offer. Apparently, penalty charges are not so high in the US, , and there was no contractual reason to stop this. But, or so says Capital Economics, house prices fell in value, and so the alternative mortgage offer was no longer available. The sub-prime crisis it appears, is in part down to the US experiencing that curse of early ’90s Britain, negative equity.

In the UK, of course, we have been through it. Unlike in the US, the UK market suffered from a major crash back in the early ’90s. This has created an environment of more ‘responsible lending.’

In the UK, for example, 100 percent mortgages are unusual.

Sub-prime lending in the UK is much smaller than the US in percentage terms. At peak, it is thought US sub-prime lending hit 25 percent of total mortgages, whereas in the UK, last year, it was nearer eight percent - or so Capital Economics has estimated.

Furthermore, if the value of a mortgage is high relative to the value of a property in the UK, then the lender looks for a lower loan to income ratio. This approach was not adopted in the US.

But, just because there are differences, it does not mean the UK is completely immune from potential disaster.

For one thing, while sub-prime lending is much lower in the UK, it has nevertheless doubled in the last three years.

But perhaps there are two more serious dangers.

Firstly, sure, mortgages to value are much lower in the UK than in the US. But in the UK, average house prices relative to disposable income are much higher. Capital Economics put it this way: “In particular, there has been a sharp rise in the size of mortgage advances relative to incomes. When we compare the ratio of house prices to average disposable incomes per employee in the UK and US, the relaxation in credit conditions on this measure has been far greater in the UK than in the US.”

You also need to bear in mind that the UK has enjoyed years of uninterrupted economic growth. But the good times cannot last forever, and only time will tell how the UK market will respond to an economic downturn.

Capital Economics said: “Simply because the potential fault lines in the UK mortgage market are different from those which helped trigger the US crisis does not mean that the UK is immune from future problems. Although we are happy to accept that lower interest rates can justify much of the recent rise in UK lending multiples, these more relaxed lending criteria have emerged against a very benign economic backdrop. Sooner or later, however, the economy will face more testing conditions. And, with the benefit of hindsight, it may well turn out that the growth in mortgage credit has run too far.”

But if there is one lesson, above all others that should be learnt from the US sub-prime crisis it is this: the fundamental reason for the US crisis was the move away from long term fixed rate deals, to variable rates with short term fixed introductory offers. In other words, the US adopted the UK model.

The British government wants the UK to adopt the previous US model, or long term fixed loans. Such a model would take the swings out of the market and create greater stability. It would enable the Bank of England to play with the rate of interest to get monetary policy right, without risking misery for home-owners. Above all, the US experience shows how dangerous variable mortgages are.

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March 28, 2007 | posted by Michael Baxter in IABN | comments (0) |

For some time now, a further rise in the UK rate of interest has been widely predicted. But then, people have been saying, with all those one-off costs, such as the price of fuel falling out of the annual figures, inflation will fall, and the Bank of England will be able to lower rates.

Against that, there is the contrary view. We have remarked on several occasions this year, on how many of the stars of the high street in recent months have not been cost cutters. John Lewis and Marks and Spencer resolutely refused to join the rush to slash prices, and yet sales soared.

In manufacturing too, there have been signs that our producers are upping costs. Last week, we told how the CBI’s latest industrial trends survey reported its price expectation index hitting a 12-year high.

Yesterday, the Bank of England’s cast of gurus spoke.

Five members of the Bank of England Monetary Policy Committee, including both hawks and doves made their latest testimony to the Treasury Select Committee.

The top man, Mervyn King, commented on what he called: “a little more pricing power in the market,” while Kate Barker and the normally doveish Rachel Lomax said the economy is: “not far away from full capacity.”

These days, the jury is out on how important the money supply is, and our central bank seems divided. Of late, the UK’s money supply has been soaring, but does this matter? Ms Baker and Ms Lomax suggested they are sceptical about how a change in the money supply can lead to inflation, but the other three members were not so sure, with Mr King saying: “to ignore it as a potential medium-term influence could lead to tricky territory.”

Capital Economics has long been predicting a fall in the rate of interest in due course. But it seems to be moving its prediction backwards. For some time, it said the falls would occur this year, now it’s talking about rates falling early next year.

But, if the fears over the rising money supply prove to be right, and if the loss in the popularity of price discounted goods on the high street, and the trend seen among manufacturers to up prices proves to be a long term trend, then rates may not fall so fast.

Meanwhile, in the US, where consumer confidence belies some of the recent turmoil, the Cleveland Federal Reserve president Sandra Pianalto has said: “We still see risks to the inflation environment.” And from those words, we can interpret that the Fed’s capacity to lower rates if the predicted economic slowdown occurs might be limited

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