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Why is economic growth so poor?

Archive for May, 2018

Why is economic growth so poor?

Thursday, May 17th, 2018

The Office for National Statistics (ONS) has announced that GDP growth is down to 0.1% from last quarter’s 0.4%. This means that the first quarter of 2018 saw the UK economy at its slowest growth since 2012.

Rob Kent-Smith, head of national accounts at the ONS, said: “Our initial estimate shows the UK economy growing at its slowest pace in more than five years, with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly.”

So what’s to blame for this sluggish rate?

With many economists forecasting a first-quarter growth closer to 0.3%, these figures seem extreme, and there are many factors that have played into them. Brexit uncertainty has played its part; before the referendum, the UK was top of the global growth league of our main industrial competitors, whereas it now sits near the bottom. There haven’t been any abrupt changes concerning Brexit in the last three months, however, to explain this sharp drop in GDP.

Some point to the weather, with the ‘Beast from the East’ and its counterparts affecting the construction sector and causing up to 30 days to be lost on some building sites, thanks to the freezing conditions. The ONS, however, has labelled the impact of the weather as ‘generally small’, with demand even increasing in some sectors, such as energy.

John Hawksworth, Chief Economist at PwC, reminds us that, “these are only preliminary figures and are based largely on estimates rather than actual data for March, when the snow was at its worst. So there could be larger than usual revisions.”

The ONS are suggesting three reasons why the rate is so low. Firstly, construction had a very bad start to the year with a drop in output of more than 3%. Secondly, 2017 saw a strong performance by manufacturing with factory output up 1.3% at the end of the year. A slower Eurozone has led to weaker demand for UK exports. Thirdly, the low consumer spending power is affecting the service sector which accounts for around 80% of the entire economy but only showed 0.3% growth in the first quarter.

Whatever the reasons may be, Philip Hammond is remaining positive. He maintains that the economy has remained fundamentally strong, despite the setbacks that the weather has brought. Time will tell if his positivity continues when further figures become available.

A cautionary tale: the Lazio case

Thursday, May 17th, 2018

Cyber-security is more important than ever before, as Serie A football club, Lazio, found out the hard way in March. After signing Dutch centre back Stefan de Vrij in 2014 from Feyenoord, Lazio agreed to pay his £6.8m fee in installments. Nothing seemed out of the ordinary when they received an email, including bank details, appearing to be from Feyenoord requesting the final payment of £1.75m, so they dutifully sent over the money. It wasn’t until later when Feyenoord hadn’t received the payment and, in fact, claimed to have no knowledge whatsoever of the email being sent, that alarm bells began to ring.

The money has since been traced to a Dutch bank account with no connection to Feyenoord at all. Somebody posing as the club with an official email signature had taken the money and run. Clearly this cyber attack, like most, was driven by the goal of monetary gain and so we can assume that it’s financial teams in organisations that are most at risk of being targeted. The most successful of these infiltration attempts are made by individuals hiding in plain sight, posing as legitimate and well established contacts and targeting more junior employees.

This is why it’s so important for organisations to be aware of these risks and to encourage a culture of education and communication that brings different teams together. An update in company culture and structure such as this needs to be instigated from the top. The Lazio case highlights the fact that financial directors and CFOs need to advocate a proactive discussion about cyber-security across finance and IT departments.

New technologies should also be embraced to help where possible. User and entity behaviour analytics (UEBA) is one example which captures user and login data to build up a profile of usual behaviour. This makes it much easier to recognise an irregularity or data breach, such as an external party getting hold of an employee’s login details.

Ultimately, human error will continue to be a factor so employees need to be made aware of just how easily simple mistakes can be made and what those errors can lead to. Some incidents will remain inevitable but the focus should be on learning and development rather than blame and punishment if companies and individuals are to move forward to a more protected and efficient environment.

The financial advantages of saying ‘I do’

Thursday, May 17th, 2018

A marriage or civil partnership can be a beautiful union of minds and hearts, but there’s no reason why it should end there. There can also be financial benefits to being with your partner, and one of these is the Marriage Allowance. In the 2018-19 tax year, the Marriage Allowance lets you transfer up to £1,190 of your Personal Allowance to your partner, meaning a tax reduction of up to £238, as long as you meet a few requirements.

For the couple to benefit, they must be married or in a civil partnership. The lower earner must have an income of £11,850 or less, and the higher earner must sit in the basic rate tax bracket of between £11,850 and £46,350. It’s worth noting that in Scotland, the higher earner’s salary must be less than £43,430 as the thresholds for basic rate payers differ.

Lower earners can transfer their unused tax-free allowances to their spouse, with the higher earning partner receiving a tax credit equal to the amount of Personal Allowance that has been transferred. The good news doesn’t end there either as the Marriage Allowance can be backdated as far as 5th April 2015. This means that, if you are eligible, you could claim 2015-16’s £212 allowance and 2016-17’s allowance of £220 in this tax year, leaving you with some free cash for you and your partner to treat yourselves.

If you’re currently receiving a pension or you live abroad, your application for the Marriage Allowance will not be affected, as long as you receive a Personal Allowance. However, if you or your partner were born before 6 April 1935, applying for the Married Couple’s Allowance might be more beneficial to you (you can’t claim both at once!).

What does the TSB experience teach us about online banking?

Monday, May 14th, 2018

TSB haven’t had a good time recently, and the same can be said for the nearly 5 and a half million customers who still couldn’t access their accounts after 7 days of technical meltdown. When the bank attempted to migrate some of their services to a new platform, involving the transfer of 1.3billion customer records, those customers were met with an array of problems.

They saw it all, from no access whatsoever, to logging in to their online banking service, to being greeted by accounts which they did not recognise as their own. One customer reported having access to a business account to which they held no affiliation, with a balance of over £2.3m. Despite releasing a since retracted statement, boasting of the ‘capacity of [their] technological management’ of the transfer, Josep Oliu, chairman of TSB owners Banco de Sabadell, was forced to accept the scale and impact of the mishandling.

The real world consequences of such a massive lockout, the size of which we haven’t seen from a British bank since RBS in 2012, are enormous. Although Paul Pester, CEO of TSB, has since taken responsibility of the IT failure and tweeted announcing, “Of course, customers can rest assured that no one will be left out of pocket as a result of these service issues,” it’s too little, too late for some customers. With business accounts being affected, some companies have been unable to pay their staff.

So in a banking climate where over 700 bricks and mortar branches closed last year, and thousands of call centre jobs are being slashed, what are we to do to protect ourselves from the next online blackout? The simple answer might be to not keep all of your money in one place. It’s worth considering opening another account so that if one bank experiences a similar problem, you’re not completely shut out.

If you’ve been affected by the TSB fiasco and want to move to another bank, first make sure you claim any compensation you may be owed by TSB. When claiming compensation, it’s important that you’ve kept a record of each time you were affected, so you’ve got evidence of the full amount you could be due.

5 pitfalls that put your retirement plans at risk

Thursday, May 3rd, 2018

Imagine the scene; you’ve spent your life living frugally, saving efficiently and investing wisely. You enter your well-earned retirement financially secure and excited for the years ahead. The future could pan out in one of two ways; the first could lead to continued security and the financial freedom to enjoy your retirement as planned; the second might lead to the unfortunate disappearance of that security and the resulting stress that would involve.

The sad truth is that the things that lead people down the second path are usually easily avoidable; it’s rarely investment market declines which are the cause of a failed retirement strategy. Here are the five most common pitfalls that you can avoid through careful planning.

1. Helping too much

We all have a natural desire to help our loved ones, but helping too much can lead to harming our own plans. It’s all too common for people to dip into their retirement funds to give money to their children, grandchildren and other relatives. There’s nothing wrong with lending a hand or giving gifts, but you have to know what you can afford and stick to your limits. Don’t be afraid to admit you can’t help.

2. Buying a second home

Having your own little getaway or spending your winters in the sun may seem like a fantastic prospect, but it’s important to be realistic. A huge portion of your retirement capital can be tied up in owning a second home, and there are often unexpected costs involved. In the past you could count on property values to appreciate, but that isn’t true of many areas now. If you want a second home in retirement, make sure you have a substantial financial cushion.

3. Unmanageable debt

Debt can sometimes be considered a financial management strategy rather than something to steer clear of in retirement. Some financial advisers may recommend investing cash to earn a higher return than the interest rate of the debt, instead of paying off the debt altogether. It does, however, come with fixed expenses and if those expenses combine with unexpected expenditures and begin to exceed your fixed income, problems can arise. Avoiding debt during retirement where possible will help avoid financial uncertainty.

4. New business ventures

A lot of retirees choose to continue working and producing income in some way. Many may decide to start new businesses. If this is something you’re considering, be careful and separate most of your retirement assets from the business. Only risk capital that you don’t need to sustain your standard of living as a failing business can erode your nest egg quickly.

5. Absence of a spending plan

One of the easiest mistakes to make is not planning your spending. A lot of retirees don’t know how much money is safe for them to spend in the early years and still ensure they have enough capital to last into their later years. Surveys suggest that people believe they can spend 7% or more of their savings each year safely, however, financial planners and economists say the spending limit is closer to 4%.

Everyone’s optimal spending plan will vary and, ideally, you should revisit your estimates each year to make adjustments. If you have any questions around this topic, please feel free to get in touch with us directly.

May market commentary

Thursday, May 3rd, 2018

Introduction
It looked for a long time that the main headline for this commentary would be the opening salvos in a trade war between China and the USA. The International Monetary Fund published a bullish report on world trade, saying that global growth will hit a 7 year high of 3.9% this year – giving a stark warning at the same time that trade risked being ‘torn apart’ by a protracted trade war.

But then came the news of North Korean leader Kim Jong-un’s, historic visit to South Korea and his meeting with President Moon Jae-in. There followed a bromance which would have been impossible just a few months ago, and a commitment to rid the Korean peninsula of nuclear weapons. The meeting would have been unthinkable at the beginning of the year when North Korea was boasting of being able to reach the US mainland with its rockets: now Pyongyang says it will invite US observers to witness the shutdown of its nuclear site in May.

By the end of the month even the China/US threats and counter-threats seemed to have receded a little and most of the major stock markets which we cover made up losses suffered early in the month on fears of a trade war. There was, however, one significant fly in the ointment as the price of oil continued to climb: Brent crude went past $72 a barrel in light of the continuing troubles in Syria and the instability in the region.

UK
Let’s start the UK section with some really good news: 2017 was a record year for the UK wine industry, as figures showed 64% more bottles of UK-made wine reached the market than in 2016. The Wine and Spirit Association said the industry was reaping the benefits of ‘huge’ investment over the last decade.

…But if April brought good news for wine, it brought yet more bad news for retail as the wet Easter proved a washout for the UK high street, following the bad weather which kept shoppers at home in March. Carpetright announced the closure of 92 stores – and you have to think that the merger of Asda and Sainsbury’s, announced at the end of the month, will ultimately lead to store closures and job losses. There have been plenty of warm words from both sides but it is hard to see that the merger can be good for jobs or, in the long term, for consumers as the number of big supermarket groups in the UK reduces from four to three.

We have commented above on the IMF forecast for world trade: that same forecast included a prediction that UK growth this year would be 0.1% higher than originally thought at 1.6%. HSBC also predicted that UK exports would rise this year by their fastest rate since 2011.

Other numbers for the UK made mixed reading: a slowdown in construction and the effects of the ‘Beast from the East’ meant that UK growth in the first quarter of the year was just 0.1% – the lowest figure since 2012. Mortgage lending was also down, as figures for March showed it falling 2.3% to £20.5bn.

There were some positive figures: wages finally climbed above inflation as the year long squeeze on pay showed signs of ending earlier than expected, and unemployment fell to 4.2% – its lowest level since 1975. And London was voted the world’s top financial centre, finally climbing above New York for the first time in five years.

The vote was presumably taken without reference to TSB: April ended with TSB taking the phrase ‘banking chaos’ to a whole new level. The bank upgraded its systems – inevitably in order ‘to improve customer service’ – and ended up seemingly giving customers access to anyone’s account except their own.

Fortunately, there was no such chaos for the FT-SE 100 index of leading shares. After some lacklustre months, it rose 6% in April to end the month at 7,509. As so often happens, the pound went in the opposite direction, falling 2% to end the month trading at $1.3754.

Brexit
Throughout April, the debate raged about whether the UK should stay in some sort of customs union with the EU after March next year. Doing so would avoid a ‘hard border’ between Northern Ireland and Eire – but would severely limit the UK’s ability to do trade deals with countries outside the EU.

It would, sadly, be possible to write an entire 2,500-word commentary on the various models of customs union – or partnerships – that are currently being discussed: we will attempt to do it in less than 200.

The first option – favoured by the Brexit supporters and known in Whitehall as ‘Max Fac’ (short for Maximum Facilitation) would see the UK and EU agree to minimise all checks, using smart technology and building on best practice from around the world (for example, the USA and Canada do not have a customs union). This means that there would be a border between the UK and the EU, but it would be as light touch as possible.

The second option is a hybrid model – the Customs Partnership – which rests on the EU recognising UK customs checks as equivalent to their own, so that goods entering the EU at say, Rotterdam, could in theory travel on to the EU without further checks.

This appears to be Theresa May’s favoured option, but has been described by hard right Tory Jacob Rees-Mogg, as ‘cretinous’ while the International Trade Secretary Liam Fox, has come out firmly against any form of customs union. With eleven months to go until March 2019, the debate will undoubtedly rumble on: but we have reached the 200 word limit, we promised. Don’t worry, the politicians will undoubtedly still be discussing it next month…

Europe
April was a busy month for French President Emmanuel Macron, who made a high-profile visit to Washington and, earlier in the month, made a speech in Strasbourg calling for ever-closer union between the EU’s member states and, as the EU faced up to the loss of the UK’s contribution, more tax and revenue raising powers for the EU.

Many commentators perceived this as Macron’s bid for the de facto leadership of the EU, with German Chancellor Angela Merkel widely seen to be in a weaker position following her eventual coalition agreement with the Social Democrats. German dominance no longer a safe bet, ran a headline in City AM.

Away from the corridors of power and in the banking halls, the European Central Bank announced it would leave interest rates unchanged, despite the pace of growth in the Eurozone starting to slow. There was bad news from Deutsche Bank, which announced ‘significant’ job cuts as it scaled back its corporate and investment banking operations. Christian Sewing, the new CEO of Germany’s biggest lender, said that the cuts were ‘painful but unavoidable’ as the bank reported a sharp drop in first quarter corporate and investment banking revenues.

Fortunately, there was no pain on the German stock market, as the DAX climbed 4% in the month to end April at 12,612. The French stock market had an even better month as it rose 7% to 5,520 – and there was even good news from Greece, with the Athens stock market up 10% to 858.

US
All the attention at the beginning of the month focused on the war of words – and potential trade war – between the US and China. It ended with the historic meeting in Korea and South Korean President Moon Jae-in suggesting that Donald Trump be awarded the Nobel Peace Prize.

Away from that potential plaudit, the US President had some troubling numbers to contend with. The US trade deficit widened in February to $57.6bn (£42bn) and there are suggestions that the US could have a trade deficit of a trillion dollars a year by 2020.

Jobs growth slowed in March, with just 103,000 jobs created in the month, and there were disappointing figures for the first quarter, as annualised growth slowed to 2.3%. Those figures are unlikely to be helped by suggestions that the US could get as many as four interest rate rises this year, as the Federal Reserve pursues a more aggressive line in a bid to keep inflation under control.

April was, however, a good month for both Alphabet (the parent company of Google) and Amazon as their sales and profits surged ahead. But it was a lot less fun for Facebook’s Mark Zuckerberg: he endured an uncomfortable month as he apologised for his company’s massive data breach at a Congressional hearing. Not a good month for Wells Fargo either, as the bank was fined a record $1bn (£730m) for failing to resolve investigations into car insurance and mortgage lending breaches.

What did the Dow Jones index make of it all? Virtually nothing. Having opened the month at 24,103, the Dow closed April up just 60 points at 24,163.

Far East
The news from the Korean border rather overshadowed China’s news in the month – specifically that the country had seen its economy grow at 6.8% in the first quarter, ahead of the government’s growth target for the year of ‘around 6.5%’ – although obviously, this figure would be under pressure from a prolonged trade war with the US.

In Chinese company news, Didi Chuxing, China’s equivalent of Uber, the world’s largest ride-hailing app and currently reckoned to be worth nearly £40bn, announced modest plans for world-wide expansion.

The Economist Intelligence Unit published an interesting article, listing the countries which were most ready for the robotics revolution: South Korea headed the list, with Japan and Singapore joining it in the top four. (The UK was in 8th place, just ahead of the USA.)

Obviously, the news of the détente between North and South Korea had a positive influence on the region’s stock markets. Only China – perhaps still worrying about a possible trade war – saw its stock market fall during the month, with the Shanghai Composite down 3% at 3,082. Hong Kong went in the opposite direction, up 2% to 30,808 and the South Korean market rose 3% to 2,515. Japan, free of the worry of North Korean missiles flying over its islands, saw the Nikkei Dow rise 5% to close April at 22,468.

Emerging Markets
US sanctions hit Russian shares said a BBC headline in the middle of the month, reporting that sanctions imposed by the US had hit the shares of companies controlled by Russian oligarchs, ‘as the Russian stock market tumbled in the wake of the sanctions.’ This followed the diplomatic crisis sparked by the poisoning of former spy Sergei Skripal and his daughter, and President Trump’s threats of tariffs on aluminium and steel.

Well, sanctions or no sanctions the Russian stock market had recovered by the end of month, closing April up 2% at 2,307. There was an even better performance from the Indian stock market, up 7% in April to end the month at 35,160 – and Brazil completed our Emerging Markets hat-trick as the market there rose 1% to close at 86,115.

And finally…
April was a good month for the ‘And finally’ section of the commentary – but we start with something that is probably best not read while you are eating breakfast.

NASA, America’s space agency has been looking for a material that can be transported into space and used for the spare parts that are inevitably needed on a long space mission. The idea is that the parts would be made using a 3D printer: but what material to use? The rocket scientists at NASA have decided that, well… human waste would be ideal. Transported into space and put to use: that’s an idea that Major Tom never discussed with ground control…

There had been widespread rumours of an exodus of London’s leading bankers after Brexit. Apparently, that is not now going to happen. A report in Politico said that the bankers’ wives – and one husband – had been to inspect Frankfurt, the rumoured new banking capital of Europe, and found it to be ‘dark, grey and dull’. So there you are: David Davis and Michel Barnier can huff and puff all they like – in the end it looks like bankers’ wives will decide the shape of Brexit.

Sadly, one wife who had rather less influence was the wife of Tanzanian gambler, Amani Stanley. So sure was Amani that his beloved Manchester City would clinch the Premier League title by beating Manchester United at home that he bet his wife on the result. All was looking good when City were leading 2-0 at half-time. Unfortunately, United stormed back in the second half to win 3-2 and Amani lost his wife for a week to his United supporting friend Shilla Tony. As yet there is no news on her husband’s gambling from Mrs Stanley…