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

It didn’t feel like it at the time, but in 2000, the UK’s public sector was lean and mean. Just 39.8 per cent of our GDP went the way of the state, much lower than Germany’s 45.1 per cent, and not that much higher than the US’s 34.2 per cent.

But today, it’s a different story. The UK’s public sector has grown, while in Germany, it’s actually shrunk - at least relative to GDP - so that today the UK and Germany both see their public sectors make up 44.1 per cent of GDP.

We still lag a long way behind France - which sees 53.2 per cent of its GDP going to the state - but, and here’s the surprise, in some regions of the UK the ratio of public spending to regional GDP is even higher than in France.

According to the Centre of Economics and Business Research (CEBR), in 2007 state spending in London was just 33.2 per cent of the capital’s GDP, but in Northern Ireland it was a staggering 70.5 per cent. The ratio was also over 60 per cent in Wales and the Northeast, which, according to CEBR, is “likely to be among the highest in the whole of the European Union.”

But at least the last 12 months has seen a fall in the ratio. Apparently, public expenditure’s share of GDP peaked in 2006 with a share of 45.0 per cent. This year CEBR expects the share to drop back to 44.1 per cent.

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

When we first heard that the BBC had got the rap over its coverage of business news, we thought “quite right too.”

It commissioned an independent report from Sir Alan Budd. The underlying theme was that the BBC is too consumer centric. For example when Barclays makes a thumping big profit the poor beleaguered over-paying customer gets all the attention, while the fact that much of the profit came from overseas, and the implications for the UK economy were almost ignored.

The report then added: “The need to attract and maintain an audience has led to some changes in the approach taken by business programmes towards a more popular style. In some quarters this is welcomed but in others it is viewed as ‘dumbing down’.
“We particularly noted this trend in The Money Programme. It is not for us to question presentational style as such but we are required to consider the effect that style may have on impartiality.”
Three recommendations were made: that the BBC needs to improve knowledge of business issues among staff; that it needs to widen “the range of editorial ideas and programming about business”; and to “ensure compliance in business coverage with standards of impartiality.”
To those points we should say “hear, hear!”
But then the report also added: “We listened to a large amount of material on Five Live and noted that occasionally some presenters and reporters gave their personal views and preferences about particular commercial products.
“We have learnt among other things that one is a fan of Majestic Wine, another is an enthusiastic subscriber to Sky and one likes shopping at JJB Sports.
“We understand that having presenters with strong and engaging personalities is an essential part of Five Live’s success but believe that there is a challenge to the BBC in combining this style with its requirement to be impartial.”
Ummmm. Is that a fair criticism? Warren Buffett would argue a key factor that should determine an investment in a company is “do you like its products?” Discussing a company’s merits from your own personal point of view is a legitimate form of analysis.
A BBC business blog also got a slating. The report said: “We noted that the business editor made a scathing attack in his blog on the newly launched Microsoft Vista operating system. This appeared to be against the BBC’s guidelines which state that blogs are subject to the same level of editorial care as other content.”

And, all of a sudden, we found ourselves feeling sympathic towards the Beeb. Sure, its coverage of business and economics can be lousy. Sometimes it can pull off the rare trick of being turgid and superficial, all at the same time.
But this report seemed equally harsh on the Beeb on the rare occasions that its journalists were showing understanding of the key issues.
The BBC should cover business in more depth, and with more enthusiasm. But it must not let reports like this make its coverage so safe, that it ends up innocuous, and only fit to be viewed by insomniacs.

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

Once again, talk of whether house prices will crash has hit the mass media. Recently, Newsnight ran a disappointing debate on the topic. Unfortunately, it was subjected to the usual superficial coverage that is the BBC’s wont. It’s funny really. The BBC is supposed to offer balanced coverage, and yet it gives the debate on the future of house prices lip service, but talks up prices several times a day with its glut of programmes on the property market.

On Sunday, The Sunday Times’s economic editor David Smith, also took an optimistic slant on the topic, concluding that house prices: “will slow going into next year but not collapse.” He said: “The bank, with its tougher language, is getting things back under control. House prices have always been at their most vulnerable when the authorities have lost control of monetary policy.”

Meanwhile, yesterday, the Telegraph business section led with details on a report from Lehman Brothers. It quoted Alan Castle, Lehman’s senior UK economist, as saying: “Real house prices are probably 15 per cent above fair value, compared to 40 per cent overvaluation in the early ’90s.”

Meanwhile Hometrack has said that there is evidence the market is at last slowing. Richard Donnell, director of research at Hometrack, said: “The steady ratcheting up of interest rates was bound to take its toll eventually.”

But it seems that all these reports, overlook key points.

For one thing, 70 per cent of mortgages taken out over the last couple of years have been fixed. Typically, they are fixed for two to three years, so the real pain of the recent rate of interest rises won’t be felt for some time.

It’s perhaps no surprise then, that the reaction to rising rates has been somewhat muted to date. The real key lies in what the rate of interest does over the next two years.

Another point relates to the future prognosis of interest rates. Incredibly, David Smith said the Bank of England is getting monetary policy under control. In reality, the money supply is continuing to expand too fast, oil is remaining way above the levels analysts have predicted it would fall to, and now there is talk that the price of corn is set to rise, thanks to its possible use as bio fuel.

But perhaps, for the key factor that determines these things, we must turn our attention to China. As you know cheap imports from China have been one of the main factors keeping a lid on inflation. This, in turn, has enabled the low interest rates of recent years.

But, right now, on the other side of the Great Wall, inflation is picking up. The Chinese government might well eventually accede to US demands and allow the yuan to appreciate. US politicians currently say the Chinese currency is 40 per cent too low. So what would happen if the yuan rose anything like 40 per cent? Answer: inflation in the west would soar. On the other hand, if China keeps its currency down, inflation will rise in China and will, in any case, lead to higher prices in the west.

Mr Smith used his Sunday Times column to argue the Bank of England was getting monetary policy under control. The truth is, in this day and age, thanks to the forces of globalisation, central banks have about as much control over monetary policy and inflation as cows do over their methane emissions.

In recent years, the forces of globalisation have led to low interest rates, thereby feeding house price inflation that no-one expected.

It seems that moving forward, those same forces could just as easily force the opposite to occur.

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

This simple statistic says it all. In 2005 the Shanghai Composite stood at 1,000 points. By close of play this morning, it had passed 4,000.

Is this a boom without precedent? Answer: no. From 1921 to 1929 the Dow Jones Industrial average leapt from 100 to 400 points, and then, of course, it crashed. In just two and half years during the late ’90s the NASDAQ went from 1,000 to 4,600 points, before it crashed. And the history books are littered with more examples of similar runs ending in tears.
The experts have told us it must end. Earlier this month Zhou Xiaochuan, governor of the People’s Bank of China, described the recent wave of surging Chinese stocks as a bubble. Last week, former chairman of the US Federal bank Alan Greenspan warned the market was seriously overvalued.
Arguably it’s the bankers and fund mangers who have their ears placed even closer to the ground than central bankers. Here too the warnings are many. For example, Hugh Young, managing director at Aberdeen Asset Management Asia in Singapore, recently said China: “is another one of these classic hot and speculative markets that will end in tears.”
The statistics are quite simply staggering. Last week, saw 300,000 Chinese people open brokerage accounts every day. Yesterday, the China stock market saw the value of shares pass $50 billion, compared to just $43.9 billion on the New York Stock Exchange last Friday, which was the last full day of trading in the US.
The trouble is this: professional investors aren’t pushing up prices, it’s consumers. The Chinese tend to be big on savings; typically they save around a quarter of their disposable income. But the rate of interest in China is just two per cent, while inflation is around three per cent, and it’s showing signs of increasing too. According to Chinese ministry of commerce figures, the price of pork in 36 cities has soared by over 40 per cent in just 12 months.
So if the effective savings rate is negative, what do you do with your money? Answer: stick it on the stock market.
But perhaps it all boils down to one statistic. According to Bloomberg, stocks listed on the key Chinese index - the CSI 300 - are now valued at 46 times earnings.
One can easily draw comparisons with the dotcom bubble. Of course the internet was a good idea; of course the potential for growth was enormous, but the markets went too far ahead of themselves and the fall out was nasty.
History also tells us that markets often crash when private investors start driving up prices. Joseph Kennedy, father of the then future president, famously sold his stocks in 1929 after a taxi driver asked for his advice. The clever man reasoned that when stocks and shares had taken on such mass market awareness it was time to get out.
The Chinese government has warned students not to put their money into shares, but you have to feel sorry for Chinese citizens who are diligently saving but have nowhere to put their money. From the objective position of several thousand miles away, it’s tempting to conclude they would be better off spending. It’s quite ironic, in a way. In the UK, the baby boomers’ generation are spending when they should be saving for the day when the numbers of retired people outnumber the workers. On the other hand, they are saving in China, where saving appears to be a sure fire way of losing money, either to the ravages of inflation or the roulette wheel of the Chinese stock market.
But here is a further irony. In India - that other great developing economy - , growth is being fed by consumers. The money supply is expanding fast and loans to consumers are helping to boost the economy.
And that brings us to Indian shares. According to Capital Economics, since 2002, India’s benchmark Sensex index has risen by 338 per cent - more than double the gain in China over this period.

We said above you have to feel sorry for the Chinese savers, who have nowhere safe to put their money. But then again, western savers have a similar dilemma: where exactly can one go at the moment without fearing a bubble?

May 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

This is the prognosis. A soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China. It’s all rather benign, says the OECD in its latest report.

The OECD said “Recent ‘hard data,’ as well as consumer and business confidence, suggest that in the euro area a vibrant German-led recovery has remained on track, despite a large VAT hike at the start of this year. Interestingly, the so-far lagging Italian economy has been sharing in the upswing, notwithstanding the volatility of the quarterly accounts. All told, the recovery in Germany and Italy in 2006-07 is set to be much stronger than initially expected.”
“In China,” said the OECD, “the authorities are struggling to contain business investment with a view to reining in the pace of the economic expansion, which at over 11 per cent most recently may have exceeded the speed limit. Such buoyancy should provide solid support both for the ongoing Japanese export-led expansion and other trading partners.”
But that bogey man inflation still threatens to scupper it all. The OECD said: “The rebalancing is not without risks. On the monetary front, there is a risk that, in many places, the balance between aggregate demand and supply has already started shifting towards overheating, at a time when the appetite for fiscal tightening may be waning.”
The OECD then went on to warn about the recent fears of bubbles building in stock and housing markets. It said: “As a general rule, spreads on risky bonds are close to historical lows and for a range of financial assets OECD analysis suggests that risk may be under-priced. Equity prices may be somewhat on the high side, for example, although current potential overvaluation in stock markets pales in comparison with the excesses that prevailed in the late 1990s.”
But what about Blighty? The OECD said “The amount of residual economic slack is also uncertain in some of the other main OECD regions, notably in continental Europe and the United Kingdom. This constitutes a challenge for central banks, which, on both sides of the Atlantic, should probably err on the side of tightness.”
Urrrrr, so what does that mean then? It means that the OECD reckons the Bank of England should continue with its tough(ish) stance on the rate of interest. In other words, the OECD thinks interest rates will stay at their current level for quite a while yet.

May 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

According to data from Verdict Research, 2006 saw another dramatic increase in online sales. It says UK online retail spending throughout the year grew by 33.4 per cent, to a record £10.9 billion. That’s almost 13 times faster than the retail sector overall.

In fact, last year saw the fastest level of growth in the online sector since the bursting of the dotcom bubble in 2001. But unlike five years ago, Verdict Research sees no reason for an end to the boom, and the retail analysts expect online sales to almost triple over the next five years.
Why is it doing so well? Well it’s not rocket science. Verdict says more widespread use of low cost broadband services is a leading reason for the boom in online shopping. Of the 3,000 consumers surveyed for the report, two-thirds of the online shopper population (which now numbers 18 million) said they have broadband access and shop online more frequently because of it.
As for the future, Verdict says that by 2011 the typical spend of an online shopper will grow to £1,056 per year, up from £606 in 2006. Overall, it expects online sales in the UK to almost triple in value, with online spending reaching £28.1 billion - equivalent to 8.9 per cent of all retail spending.
But not all retailers have been convinced by the virtues of launching online; a significant number are still resisting the urge to jump on the online bandwagon. Verdict reckons the online revolution will largely miss food retailers, where the infrastructure cost associated with an online launch and the strength of competition act as deterrents, value retailers (such as Matalan, Primark and Peacocks), whose business model depends on driving high sales densities from their stores, and many smaller specialists, whose limited scale makes it challenging to finance major online infrastructure. For these retailers the case for major investment in transactional websites is far from proven says Nick Gladding, author of the report.

We have argued before, that the surging online retail market is changing the dynamics of advertising. Traditionally the key to success for a bricks and mortar retailer were the three Ps; that’s position, position and position. But for the virtual retailer, position on Google search engine results is more important.

The traditional retailer could enjoy greater sales by paying out more in rent, and securing the best possible position on the high street. For the online retailer, though, rent has been replaced by advertising and online marketing techniques. For these retailers it’s a new set of three Ps that count: promotion, promotion and promotion.

May 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

Yesterday we told how the Bank of England considered a half a per cent rise in the rate of interest when its Monetary Policy Committee met earlier this month. This morning, the bad news on inflation comes from the CBI.

Actually, there was good news too.

Here’s the good news. The CBI industrial trends survey found that 32 per cent of manufacturing firms said total orders were above normal compared to 26 per cent who said they were below normal. That’s a rounded balance of plus five. In the three years we have been monitoring the CBI industrial trends order books index, there has only been one occasion when it has been higher. And that was in March of this year.

But, here’s the bad news.

Manufacturers are growing more confident about their ability to increase prices with the balance of firms expecting to put them up next quarter to the highest for 12 years.

Its May Industrial Trends Survey reveals 32 per cent of manufacturers expect average domestic prices to rise over the next three months compared to 8 per cent who say they will fall.
The rounded balance of +25 per cent is the highest since March 1995, when it reached +27%, and is the twelfth consecutive positive balance, in a broadly upward trend, since last May.
The CBI says prices are most likely to rise for intermediate goods, such as timber or chemicals, and consumer goods (balances of +33 per cent and +28 per cent respectively). Prices for capital goods are also picking up, although to a lesser extent (a balance of +9 per cent).

May 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

What’s that coming over the hill? Is it the US economy?

Not so long ago, Alan Greenspan was talking about there being a one-in-three chance the US would hit recession later this year; the country’ sub-prime woes threatened to de-rail the US property market and send it freefalling into crisis; and the nation’s indigenous automobile industry, for so long the symbol of US strength, seemed to be tottering on the brink of collapse.

And yet this week a string of economic data would suggest that Uncle Sam has already shaken off the worst. Maybe the great US economic slowdown of 2007 is turning out to be little more than a gentle wheeze, which a soft blow on the puffer was easily able to fix.

First there’s the property market. April saw a 14 per cent rise in sales of new homes - the biggest jump in new home sales in 14 years. Sure, prices were down. According to the US Commerce Department, April saw an 11.1 per cent slump in the median house price, which dropped to $229,100 in the month, or £115,398.

Of course, an 11.1 per cent fall in prices is dramatic, but since the fall has encouraged buyers to move back in, there would appear to be reasonable evidence to suggest the market has bottomed out.

It makes you think, doesn’t it? Median price in the US is £115,000 or so. Wouldn’t the Brits be delighted to pay so little. No wonder some are still saying the UK property market still faces the bigger danger of a crash.

Turning our attention back to the US, yesterday also revealed good news on the job market and with durable goods (that’s products lasting more than three years). Excluding sales of transport goods, April saw the biggest rise in the sale of US-made durable goods in two years.

Meanwhile, the US job market also appears to be defying predictions of gloom. According to Labor Department figures, the average number of jobless claims in April was 302,750, the lowest level since February 2006.

But perhaps the real fillip came from the OECD. The economic group, which was originally set up to oversee the Marshall Plan, is predicting a sharp recovery in US growth for the second quarter of 2007. The OECD calculates that US GDP growth slowed to 1.3 per cent in the first quarter of this year, but predicts annualised growth of 2.5 per cent in quarter two, and for US growth to then stay at that level right through to the end of 2008.

The OECD said: “In the United States, the incoming data suggest that, following a weak first quarter, economic activity should gradually regain momentum. Sustained job and labour income growth should provide the basis for a progressive return to economic normality, while excess supply of housing is being gradually worked off.”
But it’s not all roses. The OECD did say that: “The slowdown of the US economy could turn out to be of a broader nature. It might involve a mild form of stagflation, with weaker trend productivity and output growth translating into more overheating. Weaker prospects for long-term growth would help to explain, for instance, why inflation has been more persistent than expected and why business investment faltered recently, despite ample profits and still favorable financial market conditions. ”
All in all then, it appears the US may well have shaken off the dangers of recession, and during the next year or so will see steady growth. But, inflation fears remain strong. It would appear the level of sustainable US growth is not what it used to be. Recession fears might be easing, but then so too are the prospects of spectacular growth, without inflation.

May 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

Maybe, to paraphrase ’80s pop band T’Pau slightly, it’s China in his hands. Yesterday, Alan Greenspan did it again.

Earlier this year he caused all kinds of nasty fallout in the US when he warned there was a one-in-three chance the US would hit recession. Then, yesterday, the former chairman of the US Federal Bank, whose warnings on irrational exuberance made during the late ’90s were ignored, turned his attention to China. He said the Chinese stock market was due a “dramatic contraction”. And just on cue, within minutes of those remarks, down went Chinese shares.

A Chinese delegation is in the US at the moment talking trade. So far it’s been agreed there will be more US flights to China and greater access to Chinese financial markets, but the contentious issue is still a no go area.

The US wants to see the Chinese currency appreciate. The Chinese government recently upped the range the currency could move in, but experts still say the currency is undervalued by around 40 per cent. All, in all, the token movements of a few miserly per cent that we are seeing at present is just one tiny brick in the great Chinese wall.

But here is the oddity. If the Chinese yuan was to rise by, say, 40 per cent, the immediate effect would be higher priced goods from China. As you know, the single biggest factor that has kept inflation down across the world in recent years has been cheap goods from China.

So, the obvious effect of a rising Chinese yuan would be higher inflation across the developed world, and higher interest rates, just at a time when the US needs rates to fall.

Mind you, there is an element of damned if you do, dammed if you don’t. In China, right now inflationary pressures are building. This could be tackled by allowing the yuan to appreciate, or the inflation could be left unchecked. If China continues to choose the latter route, inflation from China could be exported to the rest of the world.

So, right now, it would appear, there’s a danger of global inflation picking up whichever way China reacts.

Still, in this day and age, we should be grateful. Both the US and China are talking the same language - the language of capitalism. And who needs weapons of mass destruction when you have Alan Greenspan on your side?

May 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

Here’s a joke doing the rounds amongst kids at the moment. “What do you say to a chav with a job?” Answer: “Can I have a Big Mac please?”

Poor old McDonalds. It has its five star job scheme and yet it’s the butt of jokes. And then there’s the dictionary. The Oxford English dictionary has an entry entitled McJob. It defines the word as meaning “an un-stimulating low-paid job with few prospects.”

But the fast food chain doesn’t like it, describing the definition as “out of date and insulting”. McDonald’s senior vice president David Fairhurst said: “It is time for us now to make a stand and get the Oxford English Dictionary to change the definition.”

Last year it ran a recruitment campaign with the heading “McProspects - over half of our executive team started in our restaurants. Not bad for a McJob.”

Actually, the company is right. It is insulting to the firm’s employees, and it is a form of discrimination.

Maybe all those comedians and dictionary compilers should be fired, and left unemployed, living on the streets, or, even worse, working for McDonalds.