Posts Tagged ‘investment and business news’

The latest data from the Nationwide, Hometrack and Halifax on UK house prices was out last week. And for the second time in three months they were unanimous. They all had month on month house prices falling: Hometrack by 0.1 per cent, Nationwide by 0.4 per cent, and the Halifax index recorded a 0.4 per cent drop in September. It has been frustrating over the last couple of years observing these housing surveys. Each month they have seemed to contradict each other. But all three reported falls in July, and in August two of the three reported falls (Nationwide had prices rising), and in September this rare agreement thing has happened again.

Perhaps more to the point, on an annual basis all three had prices falling too: Hometrack by 0.5 per cent, Nationwide by 1.4 per cent and Halifax by 1.2 per cent.

Mind you, they might have prices falling but house prices are not exactly crashing.

Meanwhile, politicians are busy trying to dream up ideas to try to get prices up. Nick Clegg wants to use money sitting in pension schemes to fund deposits, while Ed Balls has mooted the idea of using income from licensing 4G to fund a cut in stamp duty.

But, as is their wont, while on one hand the government is trying to dream up ideas to kick start the property market – such as funding for lending – is the other hand is also busy coming up with ideas to derail the market. According to analysis from Morgan Stanley, banks could be forced to find an extra £22bn in capital to fund changes to the way in which mortgages are risk weighted. The issue is complicated. Under the Basel rules, banks are required to hold a certain amount of capital. And under impending changes they will need to maintain 10 per cent capital ratios – other than mortgages, that is. Mortgages are seen as different, and carry a much lower risk rating than other asset classes. And who chooses this risk rating? Why the banks themselves, of course. It turns out that some banks have put such a low risk rating on their mortgage assets that, in fact, they can achieve leverage of near 100 to one – or one per cent capital.

It is not difficult to understand why the regulator is worried about this. This may seem like a radical concept, but some might say that it should not be down to the banks to risk assess their own assets.

So far then it all makes sense. Banks should not be allowed to risk assess their assets, and should not be allowed leverage of around 100:1 on some mortgage debt. It is just that if the regulators’ perfectly reasonable reservations were taken into account, bank mortgage lending might crash faster than you can say ‘property snakes and ladders’.

And that brings us to the baby boomers – you know those people who are due to swell the ranks of the retired to record levels. According to research from Lloyds Bank, just over half (51 per cent) of potential home movers are looking to ‘downsize’ within the next three years, compared to just a fifth (22 per cent) looking to trade up to a larger property. It is not that rare for home owners reaching retirement to downsize. The Lloyds TSB report, however, found that the reasons for downsizing have broadened in these tough economic times. Whilst 59 per cent want to move to a smaller property that is better suited to their circumstances, a third of potential downsizers would like to move to a smaller property to help reduce bills. Almost two fifths would like to free up equity in the property, and almost one in three said they want to downsize to help support retirement plans. A fifth of those considering downsizing are looking to trade down earlier than expected, with the majority citing financial concerns as the key driver.

So there you have it. The government can try to nudge us all into saving more, but as the UK enters the demographic moment of dread – the retirement of baby boomers – we are set to see a rush of people downsizing, creating an influx of supply onto the property market.

©2012 Investment and Business News.

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The search for green shoots continues.

Last week we said that evidence of a UK recovery is mounting: industrial production saw its biggest jump in 25 years in July, numbers employed in the three months to July rose 236,000, the OECD predicted a pick-up for the UK next year, and the CEBR forecast that for the first time since 2009, wages will rise at a faster pace than inflation in 2013.

It is not hard to be cynical. Sure employment was up, but much of the rise was down to an increase in part-time workers. The industrial production surge may have been down to no more than making up for lost production the month before because of the Jubilee celebrations. As for what the forecasters say, never forget the words of JK Galbraith: “The only function of economic forecasting is to make astrology look respectable.”

But now Mervyn King has joined the bull set. In an interview on Channel Four, he said: “I think the next quarter will probably be up. I think we’re beginning to see a few signs now of a slow recovery, but it will be a slow recovery.”

So it’s parade of promising news. But what is that? Oh dear, it’s rain.

Not so long ago, many top economists laughed off the prospects of the UK falling into another recession, not because they were especially positive, but, they argued, because output was already so low that it seemed unlikely it could contract further.

The truth is that right now, the UK’s output is around 4 per cent below peak. This is the longest downturn ever recorded. It will surely be several years before the UK’s output is 4 per cent higher than present. We are now around four and half years into the downturn, perhaps a touch longer.  A lost decade looks like a real danger.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

A lot of economists don’t get it. Why oh why, oh why? The UK economy has been contracting of late, but employment rising. In Q1 of this year UK labour productivity, measured as output per hour, fell by 1.3 per cent, and UK unit labour costs increased by 1.4 per cent. According to stats out last week, labour productivity in the UK was no less than 15 per cent below the G7 average.

The poor level of UK productivity is not news.  It has been a permanent problem for the UK for decades.

Since the start of the recession in 2007, growth of UK output per hour has trailed that of the US, and the UK’s  productivity has been lagging behind Germany, France and Italy for decades. Since the recession the gap has not grown, but it is still there.

If you give UK productivity per hour a score of 100, then US productivity is 127, French productivity is 125, German 122, Italy’s only marginally higher, Canada’s is the same, and Japan’s is less.

Then there is the riddle of how the UK’s employment rises while GDP falls. Some of the explanation lies in the rise in numbers of part-time workers, but on its own this explanation is insufficient.

Another theory, put forward by the Bank of England’s Ben Broadbent, is that financial markets are broken, and capital is being allocated inefficiently, and therefore business, starved of the necessary funding, is putting cash flow before investment. So rather than investing in new equipment that requires a big up front outlay, businesses are employing more staff. Extending that argument, maybe business lacks confidence. Its lack of certainty means it is reluctant to invest, and therefore hires more staff to meet outputs targets.

Martin Wolf took a look at these problems in the ‘FT’ a few days ago. He also speculated that falling wages may encourage businesses to take on staff, even when the extra productivity generated is not that great.

But then the issue of why the UK lags behind the other major economies has been troubling economists and politicians alike for years. Take this article in the ‘Economist’, from 1998:  The British disease revisited

You may recall that solving the UK’s poor productivity was considered to be something of a priority for the Blair government. One theory doing the rounds at the time when Tony Blair moved into number 10 was that the UK’s poor productivity was down to low investment, and that was down to the erratic nature of the UK economy, drifting from boom to bust. It is quite interesting to look back at Gordon Brown’s claim that he had put an end to boom and bust; it now seems daft. Indeed, his preoccupation with steady growth may have hidden underlying problems. It is just that in 1998, the idea made an awful lot of sense.

Here are some theories.

Part of the reason why labour productivity has fallen in recent years is down to the smaller slice given over to the City in the UK economic cake. You may argue that much of the City’s productivity was illusionary, but the fact is that, on paper at least, it is highly productive. As it cuts jobs, overall productivity falls.

As for why the UK lags behind most of the G7, maybe we need to rewind the clock back to 1997, and ask what the problems were then.

To an extent the comparison with France and Italy was clouded by the fact that employment is much lower in these two countries. Labour laws are so tough, that employers only take on more staff if the productivity gains that result are very significant. There is also anecdotal evidence that workers, and in particular management, work longer hours than they are declaring. So they have certain targets they wish to meet, but there is a limit to how many hours they are allowed to work, so they work longer to meet those targets and lie on their time sheets.

But that does not explain Germany and the US. German unemployment is lower than in the UK. Output per worker is higher. It doesn’t explain higher productivity in the US, where labour laws are of course much looser.

Well, in 1998 McKinsey came up with a theory. So, quoting the ‘Economist’ quoting McKinsey, ”[the problem partly] lies in the effect of regulations governing product markets and land use on competitive behaviour, investment and pricing.” The ‘Economist’ piece continued: “Although British food retailers are world leaders, says McKinsey, they would do better still if planning restrictions did not stop the building of stores on the scale of America and France. Hoteliers are hobbled, say the consultants, because not only are almost half of the country’s hotels more than 100 years old, compared with 3 per cent in America and 14 per cent in France, but they are constrained by planning restrictions. And until recently telecoms regulators kept call charges too high relative to line rentals, discouraging greater use of telecoms.”

And if that sounds like déjà vu, maybe there is a good reason. After all, David Cameron’s call for less dither, and to make it easier to build, is very much targeting this same issue.

It just goes to show that 15 years later, we have completed the longest ever run of economic growth, but we are in the midst of the worse downturn ever, and yet peek beneath the surface and some of the challenges haven’t changed at all.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here