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

More evidence emerged yesterday to suggest that at last the housing market is responding to all those rate hikes.
According to property website, Rightmove, house prices rose by just 0.3 per cent in July.
Miles Shipside, Commercial Director of Rightmove comments: “This is further evidence that the ‘mini boom’ is coming to an end. As long as employment remains buoyant, prices are likely to remain broadly at these levels. However, depending on local supply and demand, sellers are going to have to duck and weave with their asking prices, especially if there is another rise in interest rates. This may be less likely now as there do seem to be further ‘indicators suggesting a softening in the housing market’ as referred to in the MPC’s latest minutes.”

Rightmove made much of the differences between the market in London and the rest of the UK. While the London market continues to show signs of cooling, the annual rate of increase is virtually double all other regions of the country. The closest contender to London’s 21.7 per cent annual increase is the Yorkshire and Humberside region where prices have risen by 11.4 per cent. Even the capital’s neighbours in the South East and East Anglia have a rate less than half that of London, at 10 per cent and 10.4 per cent respectively.

“Shortages of supply will remain more acute in the capital, as suitable building land is harder to come by and demand will continue to grow as the City strives to become the financial capital of the world. The consequent upwards pressure on prices can be absorbed by highly paid City workers, but it exacerbates the existing problems for key workers and first time buyers in London.”

An interesting phenomenon that Rightmove has picked up on has been the rise in the price of cheaper property types.

Terraces have risen over 30 per cent faster than semi-detached and detached property in the last 12 months, with an annual rate increase of 11.8 per cent. Flats have risen at a staggering double the annual rate of house price inflation for semi-detached and detached properties, with asking prices 16.5 per cent higher than a year ago.

Miles Shipside explains: “The number of households is growing, but new households are faced with limited choice in the ‘affordable’ sector that Gordon Brown has promised to create to help first time buyers get onto the property ladder. The result is increasing price pressure on the cheapest property types of terraces and flats, especially in the London market where more jobs are created to support the capital’s buoyant economy. Building more affordable housing is the right solution, but the Prime Minister’s revised target of 40,000 extra homes per year starting in 2016 is too little too late.”

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

Tax. It’s all about tax they say. The UK’s competitiveness is being killed because of our tax regime, or so say the critics. Others say taper relief on capital gains tax, so controversial when applied to private equity, is essential for encouraging our entrepreneurs.

And yet, think about it. How many entrepreneurs move into the brave world of setting up a business because of taper relief? Most don’t even give it a second thought.

In fact, according to research from the NatWest and RBS, who have just launched a new small business monitor, entrepreneurs’ overriding consideration is a “strong desire to be in control of their own destiny.”

In fact, the survey found three key motivators for entrepreneurs.

17 per cent of respondents talked about wanting to gain more control over their lives and avoid being told what to do. Interestingly, for owners of small enterprises less than two years old, this factor was even more important, with 29 per cent citing this as their main motivation.

16 per cent of entrepreneurs said that they set up their own business because they had spotted a market opportunity which they were ready to exploit .

In third place in the list of motivating factors were those who were motivated to set up because of the working experience and knowledge already gained from previously working in that particular business sector. Fifteen per cent cited this reason.

Just 6 per cent of small business owners said they started their venture to make money.

It would appear that only once the business is established does the lure of money beckon. Over a quarter of entrepreneurs with a business that is up and running say that increasing profits is their main objective.

Entrepreneurs are, by their nature, an optimistic breed. This is evident in their predictions for the years ahead of them. Following a difficult year in which higher energy bills and other input costs took their toll, 49 per cent of small businesses are saying that their turnover will rise with 32 per cent expecting their profit margins to increase. With regards to jobs, the outlook is considerably more positive than it has been over the past 12 months with 17 per cent of small firms reporting that they will increase employment, though markedly faster among larger businesses.
So, what lessons can we draw from this report?

Entrepreneurism is all about taking risks. The current system is too geared towards providing a tax efficient reward years down the line in the form of taper relief. Private equity may be able to enjoy a swift return on investment, but the true entrepreneur has a long slog before profits come in.
In the meantime, the entrepreneur will often sacrifice salary and have to borrow heavily to fund his or her living expenses while their business grows.
Income can swing wildly. The current tax system works against the entrepreneur if one year their salary is only a few thousand pounds (barely above personal allowance thresholds), moving in the next year to over the 40 per cent tax level.
A system that favoured the entrepreneur would make it possible to tax average income over a period of time. The current system penalises the risk-taker. It penalises those whose income fluctuates. Taper relief does nothing to address this.

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

So how much do you pay your little darlings? These days, of course, kids have disposable income. They are an important target audience for business. But, how much do they earn?

According to research from the Halifax pocket money has grown sevenfold since 1987, jumping from £1.13 to £8.20 a week in 2006. In fact this means our kids have seen their pocket money increase six times faster than the rate of inflation.

So, while wages have stayed in check, children across the land have been enjoying inflation busting wage rises.

Mind you, the last 12 months weren’t so good. Average pocket money has fallen, and right now your average take home pay for children working their socks off down the park, or in front of the Nintendo, is £8.01.

But, it’s been a good year for the children of the South East. Their average pocket money today is £10.43, compared to just £8.03 last year. So they have gone from being poorly paid, below-average wage earners, to become the jet setters of children’s world.

But, the kids of London however, have not done so well. Last year, they were the best paid, enjoying pocket money of £11.71. Today their average drag on their parents’ income is just £8.16.

Children in the North East of England received the least pocket money this year, with an average of £5.70 per week.

Girls are the big winners, twisting their daddies around their little fingers: 71 per cent of girls get weekly pocket money, compared with 68 per cent of boys.

So does this mean we are creating a nation of savers, diligently learning how to balance their books, and save for a rainy day? Well, some are saving. DVDs and computer games are their target, as are mobile phones and related paraphernalia and clothes.

It would seem likely that for many parents, giving their children pocket money could be classified with luxury goods. As disposable income increases, the amount of money they set aside for pocket money shot up as a result. The recent fall is presumably an early indicator of how we are feeling the pinch from all those rates hikes at a time of rising utility bills and fuel costs.

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

For individuals suffering from the floods it’s a miserable time. For the insurance companies, no doubt, financial results will suffer. But what about the cost to the economy at large?
Two weeks ago we thought it was bad. In hindsight, of course, it was just the beginning, but even for the period up to the beginning of January the bill was mounting.
Two weeks ago, for example, the Association of British Insurers said it estimates “that some 27,500 homes and 7,000 businesses were affected. The increased number of business claims, together with clearer information about the amount of damage to many homes, has led us to revise our previous cost estimate to around £1.5 billion.”
But since then the heavens have opened up a good deal more. Latest estimates put the bill at £2 billion.
The truth is the flooding is not over, and the bill is bound to rise. One thing is for sure, the insurers will have to fork out a lot of money, and their results will be hit. Even so, right now, it appears, most are expecting the bill to be no higher than in 1990.
It begs the question, “how will the economy as a whole be affected?”
Even before the flooding, the High Street had blamed slowing sales on the weather. And you can be sure that when the figures for July are out, we will see a High Street that has been struck hard.
But, according to Capital Economics, “The clearest impact on the economy will be a fall in agricultural output.” But then again, it adds, since agriculture only accounts for 1 per cent of Great Britain PLC’s turnover, even if the entire agriculture industry produced nothing for the year, the UK’s GDP would be reduced by £13 billion. But, in practice, the prime agricultural regions are East Anglia and the South West, which have not been hit so hard.

Furthermore, 60 per cent of agriculture output is down to dairy farmers, and it is thought this sub-sector will not be badly affected by the weather.

Then there’s tourism. Clearly the local tourist economies in Gloucestershire, Worcestershire and Warwickshire, which includes Stratford upon Avon, will be hit hard. So too will the Cotswolds, which is such a popular tourist spot with our American visitors, but then again, the tourist industry only accounts for 1#189; per cent of our GDP, and Capital Economics reckons tourists will probably just spend their money elsewhere, perhaps deciding to stay longer in the capital.

It would appear that London, as if it wasn’t booming enough already, could actually benefit from the flooding by receiving even more tourists than usual.

Of course there are fears that the flooding will lead to an increase in the price of foodstuffs but, then again, most of our food is imported. We can easily import more.

Paul Dales at Capital Economics said “The upshot is that as disastrous as the floods are to those directly affected, our best guess is that the overall economic impact may be to reduce output by a near-negligible £2-3bn, or 0.2% of GDP. This sits comfortably with the historical precedence provided by similar disasters, such as foot and mouth, where the initial concerns were out of proportion with the ultimate impact on the economy.”

July 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

Two pronouncements of rain have made the headlines this morning. As the clouds rolled in, the Ernst and Young ITEM Club talked about how “hard-up consumers will begin to rein back on their spending.”

The ITEM Club published its latest assessment of the UK economy this morning. It was full of warnings about the damage rising interest rates will have, and talked about treading carefully on the rate of interest path. And yet, on the whole, the ITEM Club report wasn’t half bad.

ITEM is predicting strong GDP growth of 2.9 per cent in 2007 and 2.5 per cent for 2008.
Peter Spencer, Chief Economic Advisor to the Ernst Young ITEM Club, explains, “Everyone is getting worried about monetary growth and interest rates. But, the economy is not going to take a tumble, particularly with the global picture so firm. The Bank has acted forcefully, but it now needs to be careful not to squeeze the UK economy too hard. The MPC needs to rebalance the economy and cool the housing and financial markets, without jeopardizing exports.”
ITEM expects interest rates to move up to 6 per cent and then stabilise, which Spencer believes should be enough to halt the excesses in the housing market. Gas and electricity are now bringing down CPI inflation, which is likely to fall back towards the 2% target this autumn, giving the Bank breathing space. Spencer says, “Whatever the timing of any further tightening, it now seems clear that we are all going to have to get used to a period of significantly higher interest rates. Our forecast therefore assumes that interest rates will rise to 6 per cent, possibly as soon as August. What happens then depends on whether people take heed of these rate rises and adopt a more cautious approach to their personal finances.”
World demand for business and financial services continues to surge and is a major driver of growth in the UK. However, the current UK expansion is becoming too dependent upon the performance of these sectors and the financial market activity associated with lax credit and monetary conditions.
Spencer says, “Our worry is that the buoyancy of the business and financial sectors will continue unabated, and that rates will need to be raised further to subdue this exuberance. If that happens, the housing market and the high street will be very exposed. These developments have the potential to cause a major slowdown in the consumer sector. However, the shake-out from the US sub-prime market has raised the cost of debt to hedge and private equity funds and this is likely to slow the pace of MA activity. With a bit of luck, this will just blow away some of the froth at the top of the market.”
Spencer concludes, “Hard-up consumers will begin to rein back on their spending. However, thanks to the resumption of real income growth as employment and earnings improve and energy and utility prices fall back, we expect a recovery in the saving ratio to 4 per cent by the end of this year and 5 per cent by the end of 2008. Employment and earnings have been surprisingly weak in recent months, but recruitment surveys suggest that they are set to strengthen. On this view, real disposable incomes are set to grow by 3.1 per cent next year, while consumption growth will slow to 2.2 per cent.”

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July 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

So what is China going to do with its $1.2 million in foreign reserves? Up to now, it’s been cheap loans.

In some ways, the cheap loans have been rather fortunate. Both the UK and US are finding themselves in a strange position.

The assets they hold abroad relative to the value of assets held in the UK and US by foreigners is falling. And yet, dividend payments flowing into the UK and US, relative to payments flowing out, are doing rather well.

The reason for this, it would appear, is that we have been investing in more risky assets abroad, and have enjoyed good returns as a result. Foreigners, on the other hand, are buying UK and US bonds, which offer a miserly rate of return.

But, signs are, this is changing.

Earlier this year we heard how China is pumping a Chinese fist full of dollars into private equity company Blackstone.

Now it has emerged that the Chinese government, in conjunction with the government of Singapore, is close to pumping $10 billion into Barclays Bank.

The money will form a critical part of Barclays’ war chest as it seeks to purchase Dutch bank ABN Amro, in competition with the consortium of RBS, Santander and Fortis of Belgium.

It is understood that if Barclays wins the bid for ABN Amro, then the Chinese government will have a 7 per cent stake in the group and Temasek, the investment arm of the Singapore state, will have 3 per cent.

What a different animal Barclays will become. Its head office will be Holland, and its biggest shareholder will be the Chinese government. My, haven’t times changed.

If the bid for ABN is unsuccessful, however, it is understood that China’s and Singapore’s investment will be reduced for a smaller stake.

It has been said that if Barclays fails to win the fight for ABN, it could itself become a takeover target. It appears to us that the injection of money from China and Singapore will make this a lot less likely.
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July 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

It didn’t make many headlines but it was important.

Back in May, the price of US imports from China rose by 0.3 percentage points. At the time, former Fed chairman Alan Greenspan said “disinflationary pressure” from China may be fading.

Now the figures for June are out, and once again, US import prices rose by 0.3 per cent.

According to Bloomberg, this is the biggest back to back increase since records began. Although as records only go back to 2003, we don’t have a lot to go on.

The point is this. If prices in China rise, then so too will prices around the rest of the world. But if the yuan itself rises in price, as per the wishes of US politicians, including Hillary Clinton, costs from China will rise further in their wake. It’s a compound effect; if you get both happening at the same time, inflationary effects are multiplied.

Our point? China appreciating the yuan is not the panacea US politicians think it is.
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July 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

Another debate doing the rounds at the moment relates to what inflation indices we should look at.

Some say that when looking at inflation, the central bank should examine inflation data with food and energy taken out. After all, goes the argument, if fuel prices go up we are all worse off, and therefore there is no need to try and reduce demand through upping the rate of interest.

To an extent central bankers did follow that line of reasoning earlier this decade, and certainly when oil started to move upwards in 2004 and 2005 the rate of interest stayed relatively modest.

But there is a counter argument. It goes like this. Firstly, you can’t have it both ways.

Sure, cheap Chinese imports, (largely thanks to the huge capacity that is emerging in China) have helped keep inflation down, but then it’s been demand from China and India that has helped push the price of oil up, and now, increasingly food, also.
You can’t count the blessing of cheap imports prices when looking at inflation, but ignore the curse of higher commodity prices.

Besides, there is also an argument to suggest that higher prices of commodity items reduce the price of other consumer goods. The reason: consumers are forced to cut back their demand for one type of product, maybe furniture, leading to a fall in price, if they are being forced to spend more on their fuel and food.

So, it would appear, to ignore food and energy when measuring inflation, is very flawed.

But now, the Bank of England has thrown a new spanner into the works

Mervyn King, the Bank of England’s governor told the BBC radio 4 programme, Inside Money, that he wished mortgage payments were included in the inflation data.

The UK’s central bank is supposed to target a 2 per cent rate for the consumer price index. But this index does not include mortgage payments. The retail price index, on the other hand does. And in June, while the CPI index fell to 2.4 per cent, the retail prices index actually rose slightly to 4.4 per cent.

As house prices go up, mortgage payments go up with them. As rates start moving up too, then the cost of mortgages rises even faster, causing the retail price index to increase.

It seems almost perverse. The policy of upping the rate of interest to fight inflation by curbing demand can, in the short-term, increase inflation when mortgage payments are included.

But what Mervyn King’s comments do show, is that he is worried about the inflationary dangers of rising house prices.

And so to answer the question we left hanging from the previous article, from an inflation point of view, does it matter that asset prices are rising. It would appear that our central bank’s governor would say “yes, it does.”
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July 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

Bloomberg said it beautifully, this morning. “The increasing integration of the world’s economies isn’t fully understood.” And that in a nut-shell says it all. As China grows, and becomes an ever more important player on the economic scene, its economic growth seems matched only by the growth in the number of theories to explain its impact.

But there is one respect in which economists are united. The $1.2 trillion in foreign reserves lurking in the virtual vaults of the Chinese state are becoming very important indeed.

Some say the Chinese government’s policy of keeping the yuan down in the value is fuelling inflation across the globe.

First let’s explain what’s going on. Just for the sake of simplicity assume there are just two countries in the world: the US and China. US business buys Chinese goods, but China does not buy any goods or services back from the US. The result is that China builds a trade surplus and the US a deficit.

But by definition, if the US is buying goods from China but not selling any to the economy behind the Great Wall, , then China must be providing a line of credit to the US.

And that is what’s happening. China could take a different approach, and allow the massive demand for its yuan to lead to an increase in the currency’s price, but instead the Chinese government is deliberately keeping the yuan down, by matching the sale of Chinese goods through the purchase of dollars and other foreign currencies, usually through buying bonds- especially treasury bonds.

The result is that supply of credit is escalating. Some say this is the fundamental reason behind the recent rises seen in the money supply across the world, as China floods global markets with credit.
It’s these rises in the money that have so spooked some central bankers, especially Mervyn King at the Bank of England and Jean-Claude Trichet at the European Central Bank.

But then again not everyone agrees that the recent rise in the money supply will lead to inflation. They say it is a symptom of the economic environment, not a catalyst for change.

At the Bank of England, David Blanchflower and Rachel Lomax seem to be non-believers in the alleged dangers posed by the money supply. French president Nicolas Sarkozy doesn’t believe either, and in the US, the Fed doesn’t even bother to monitor the money supply quotient known as M3.

When you think about it does seem a little strange. How can China be accused of building up inflationary pressures, when the very thing that has created its trade surplus has been cheap exports?

In any case, It could be argued that the carry trade, in which money flows from Japan where the rate of interest is very low, into countries such as the US and UK, not to mention Australia and New Zealand, where the rate of interest is higher, might be a bigger cause of the growing supply of credit.

Maybe to blame China for Anglo Saxon borrowing is a little like blaming a bank when its customers get into debt.

Maybe the real culprits are us, the consumers. We are not saving enough, and when you consider the pending pension crisis, this is a major worry.

The consumer boom has been funded by borrowing. We have been encouraged to think this borrowing is viable because of the rise in asset prices has made us feel wealthier. But these rising assets values - namely house prices, have perhaps been funded by the boom in liquidity.

Maybe China has helped keep high street prices down, but a side result we have seen soaring asset prices.

But does this matter? Read on#133;#133;#133;
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July 20, 2007 | posted by Michael Baxter in IABN | comments (0) |

But, while the Dow soared, and shrugged off subprime woes, another company shrugged off problems with the Xbox 360.

Microsoft announced its latest results yesterday, and despite a problem with the Xbox 360 forcing the company to extend the length of the product’s warranty and incurring $750 million in costs, revenue in the second quarter jumped 13 per cent to $13.37 billion and profits came in at $3.03bn, 11 per cent up on last year.

What with Vista out there now, Microsoft is enjoying something of a purple patch. Chief operating officer Kevin Turner said “surpassing $50bn in annual sales is a testament to the innovation and value that our product groups delivered into the marketplace.”For feedback and comment contact the
editor
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