Independent or not, Scotland needs the pound September 15 2014, 0 Comments

The United Kingdom has been one of the most stable and prosperous of economic unions in history. The UK came into existence in 1707 with the Act of Union between England and Scotland - with Wales being under English control since 1284. Even before Union England and Scotland had common resources and institutions – including shared Monarchs since 1603, and, of course, the pound.  Indeed, the Banks of England and Scotland have shared the pound for the last 300 years.

Sterling's strength undermines UK rebalancing July 13 2014, 0 Comments

The extent to which an export recovery can help the UK economy rebalance in the short term is in doubt following latest trade figures released by the ONS this week. Rebalancing has occupied centre stage in recent months as the UK looks to shake off its over-reliance on private and public debt. The two pillars of rebalancing – private investment and exports – have both weakened in recent months

Transfer pricing June 16 2014, 0 Comments

Transfer pricing is a method of pricing goods and services transferred within a multinational company in order to reduce tax burdens and maximise profits for the whole enterprise. It is one of the reasons why globalisation has increased and why operating in more than one territory can be beneficial for firms looking to minimise their overall tax liability. The purpose of transfer pricing is to push profits into territories where either the tax rates are more favourable, or where more loopholes exist to be exploited.

UK energy market to be investigated by the new competition watchdog March 30 2014, 0 Comments

This week Ofgem reported its findings on the state of the UK energy market, and concluded that there was sufficient evidence for a referral to the new Competition and Markets Authority (CMA), including excess profits, soaring prices (which increased by 24% between 2009 and 2013 – 10% above the CPI), and increasing consumer distrust. This assessment was jointly undertaken by Ofgem, the OFT and the CMA.

Youth unemployment February 24 2014, 0 Comments

As with adult unemployment, the level of unemployment of 16 – 24 year olds in the UK fell in the last quarter of 2013 to 917,000 – down 48,000 – with the unemployment rate now at 19.9% - down 1% - further indication that aggregate demand in the economy is growing. The drop affected only the 18-24 year old group, where the rate fell from 19.1% to 17.9% (734,000), with unemployment among 16-17 year olds actually rising from 36.2 to 36.4% (at 183,000). In contrast, 50-64 year olds are the least at risk of unemployment, with a rate of just 4.4%.

Bank of England downgrades unemployment threshold February 15 2014, 0 Comments

The Bank of England has updated its forward guidance policy (12 February 2014) in the light of the December unemployment figures, which showed a sharp drop to 7.1% - just short of 7% unemployment threshold set n August. Despite the unexpected fall in the unemployment figures, the Bank estimates that there is still sufficient slack in the economy to keep interest rates at 0.5%.

House prices up by 8.4% January 06 2014, 0 Comments

The last time I wrote about the UK housing market, back in 2012, average prices had fallen for three out of the previous four quarters, and confidence in the market had hit rock bottom. Indeed, the last time house prices rose consistently for all four quarters was back in 2007 – just before the bubble burst. When it did burst, most analysts agreed that, whatever the causes, the housing market needed to go through a substantial re-adjustment, given the bubble had pushed up house prices to unsustainable levels, with affordability falling to an all-time low. Between 2007 and 2013, the housing market flat-lined, with occasional signs of life being quickly snubbed out as confidence plunged and the economy approached a triple-dip recession.  Today, with positive GDP growth and rising confidence, as witnessed by the highest level of mortgage approvals in six years, it is not surprising that the latest bundle of figures indicates a market in the early stages of take-off, with headline housing inflation rates of 2.7% in the last quarter of 2013 (the highest since 2009), and an annual rate of 7.1.% (the highest annual rate since 2007), with annual prices rising by 8.4% in the 12 months to December. Geographically, Manchester, London and Brighton topped the regional markets, with an average inflation of 21% and 14.9% and 12% respectively. Perhaps it is time to reconsider some of the lessons learnt in the last boom.

According to Kate Barker of the Bank of England, higher demand and shortage of supply are the fundamental reasons for the long-term upward trend in house prices. In the previous bubble, lower nominal rates created a considerable ‘front-loading’ effect, so that individuals found it much easier to pay at the start of taking up a new mortgage – hence, new buyers were attracted into the market.  With employment prospects looking good, the effect is amplified.  Affordability in an era of low interest rates is really an issue of getting enough to pay a deposit, rather than of long term affordability in terms of meeting repayments.  On top of this, then, as now, real interest rates had also fallen to historically low levels, with inflation running ahead of nominal rates. Research suggested that real interest rates had fallen from around 4% in the 1990s to 2% in recent years. In addition, the slow growth in supply relative to demand had a major role to play - estimates suggest that around 190000 new houses needed to be built per year to constrain inflation – on average only 135000 new house were built per year in the 2000’s. The final element, according to the Bank of England, appeared to be the ongoing preference for housing as an alternative investment to other assets.

Of course, all of these fundamental conditions are still in place, so any upturn in confidence – which we are now experiencing - is likely to be converted very quickly into house price inflation. If we add in the, albeit modest, effect of the government’s Help to Buy scheme, which has attracted some 6,000 borrowers since it was launched in October 2013, then conditions are now right for a price surge.

However, as always, we need to keep things in perspective. According to the Council for Mortgage Lenders chief economist, Bob Pannell, "Gross mortgage lending for 2013 looks set to reach £170 billion - higher than the £156 billion we originally forecast, but still a far cry from the £363 billion experienced at the height of the lending boom in 2007 and …. the next two years are unlikely to see lending levels getting very far above £200 billion a year." So what we can conclude is that, without any specific intervention, house prices are likely to increase by in excess of 5% for at least the next couple of years. Whether these rates are too worrisome for the Bank of England remains to be seen.

GDP forecasts December 30 2013, 0 Comments

As 2013 draws to a close, can we look forward to a more prosperous New Year? This time last year the talk was of an historic triple-dip recession. That did not happen and virtually all current indicators provide a more positive outlook for 2014. The easiest job at the moment must be George Osborne’s script-writer ‘..unemployment down, employment up, inflation down, confidence up, a recovery in the housing market..’ just for starters.

Looking forward, the magic number for 2014 is 2.4%, with the CBI, the OBR and OECD all expecting this level of growth, and with the IMF forecast a little more conservative at 1.9%. In other words, back to its long-term trend rate – that it, the sustainable rate at which no significant macro-economic problems will emerge. Expectations are widespread that growth with come from a continued falling savings ratio, an upturn in fixed investment and solid growth in UK exports sales (which are still below those of 2008!).

Dig a little deeper and performance over the last three years indicates a deep and wasteful output gap, with output failing to get to even half the trend rate for the UK, averaging a mere 0.18%. Productivity has hardly budged over the last three years, with output per hour worked less than at the end of 2010. Also, long term unemployment is edging ever higher. This leads one inevitably to wonder whether the Bank of England’s forward guidance policy is just a little too mean spirited when it comes to falling unemployment. Surely, setting a ‘trigger’ level of 7% is too cautious, even though the Bank is a pains to state that this is not a level which would trigger an automatic increase in interest rates. And clearly it is time for the Bank of England to factor out the buoyancy of the housing market, and give the Chancellor something to do. Raising interest rates are, surely, not the way forward in terms of tackling house price inflation, which, even at its most rampant, creates only a modest wealth effect. But it does, never-the-less, need to be tacked for other reasons – none the least being the widening wealth gap, rising inequality, and falling labour mobility. Sorting out the housing market is, without doubt, the Chancellor’s biggest test to date.

CPI inflation down to 2.1% December 18 2013, 0 Comments

More good news for the Chancellor and Governor of the Bank of England this week as the downward trend in inflation continued. November’s Consumer Price Index (CPI) grew by 2.1% in the year to November, down from 2.2% in October – just 0.1% off target.

Further clarification of forward guidance November 15 2013, 0 Comments

MPC member Martin Weale provided further clarification of the Bank of England’s ‘forward guidance’ policy when he addressed A-Level students at Quintin Kynaston Community Academy in London. Martin explained that the unemployment threshold did not meant that interest rates would automatically be raised if unemployment fell to 7%, only that it will review the situation.