Posts Tagged ‘Organisation for Economic Co-operation and Development’

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If 10cc were to write a song about the latest surveys on the UK economy they might say: “I don’t like surveys. Oh no, I love them.” The fact is that the surveys are not just good; they are remarkable, but can they really be right?

It was told here on Tuesday how the latest Purchasing Managers’ Indices (PMIs) on UK manufacturing and construction were pretty darned impressive. The last index tracking manufacturers’ output and another for new orders, both produced by Markit/CIPS each rose to their highest level since 1994. Another index, this time tracking construction, rose to its highest level since 2007.

Then yesterday came the PMI for services, and a composite index which combines the PMI readings for manufacturing, construction and services. The PMI for services rose to its second highest level in the 15 year history of the index – the record was set in December 2006.

As for the composite PMI, this rose to 60.7. Now you might say 60.7 what? Well to put this reading in context, any score over 50 is meant to be consistent with growth. And the 60.7 reading just happens to have been the highest reading ever recorded during the 15 years that these composite indices have been produced.

So what does this mean? Markit reckons its surveys points to growth in Q3 of between 1 and 1.3 per cent compared to Q2.

Also this week, the OECD was busy revising upwards. It is one of those strange-but-true quirks that forecasters tend to revise their predictions downwards when we enter a downturn, and revise upwards when we exit. The OECD is now predicting that the UK economy will expand by 3.7 per cent in Q3 on an annualised basis. Incidentally, if its forecasts are right the UK will be the fastest growing economy across the G7 in the second half of this year. But if the PMI indices are right, the OECD will in fact be understating the truth.

So far then it is all good stuff.

Can it last? It is clear that the Help to Buy Scheme has helped to buy the UK economy more growth. The danger remains, however, that the chancellor is creating growth from a new housing bubble. The Bank of England dismisses this, but do members of the MPC, for all their cleverness, understand the British psyche, and how prone it is to getting behind housing booms, even when they are built on smoke, mirrors and the naive belief that interest rates will stay at near record lows for the 25 years during which they still have a mortgage.

But there are reasons for hope, however. Take for example the news that Nissan is creating 1,000 new jobs, as it expands its factory in Sunderland – a car factory by the way that some people claim is the most efficient in the world.

Or take UK trade. Since the end of 2011, UK imports have grown by 5 per cent and exports by 6 per cent. According to the ONS, UK exports to the BRICS countries as a percentage of total UK exports have increased from 2.6 per cent to 9.1 per cent over the last 15 years. 6.0 percentage points of this rise have occurred since 2006. Okay imports have risen too, but in the last couple of years UK exports growth to the BRICS has outstripped import growth to those same countries.

It is just a shame the chancellor cannot put the same level of commitment into what we might call a Help for Business Scheme as he has put into the housing market.

© Investment & Business News 2013

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Facts don’t seem to be all that important. If you want to express an opinion on immigration, it appears what matters is who can shout the loudest, and who is best at riding the latest populist wave. Many people say that immigration is the most important issue concerning the UK today. How about this for a contrary view? It may be more accurate to say the way in which the topic of immigration is portrayed in the press poses the single biggest threat to the UK today.

Let us look at some of the arguments often bandied about. First off, the UK is swamped by immigrants. The OECD has taken look at data on immigration flow for 2011 (or for the latest year for which data is available) for 24 of the largest OECD countries. The country with the largest inflow of immigrants was Switzerland, followed by Norway, then New Zealand, Australia, Sweden, Spain, Ireland, Denmark, Canada, Belgium, Austria, the Netherlands, and then the UK. In fact, migration inflows into the UK were less than the OECD average.

Now look at the migrant population, which is to say the percentage of population for each country who were foreign born. In the case of Luxembourg, the number stands at around 40 per cent. The OECD average is around 13.1 per cent; it is 12 per cent for the UK. In fact across 32 OECD countries, 15 have a higher proportion of their population who are foreign born, while 16 have a lower proportion. In other words, the UK is below the mean average and just above the median average.

What many people forget when talking about immigration is the other side of the coin: emigration. Setting aside the fact that immigration into the UK is below the OECD average, what many overlook is that the UK also sees a high level of emigration. According to the ONS, “500,000 people immigrated to the UK in the year ending September 2012, which is significantly lower than the 581,000 who migrated the previous year…. 347,000 emigrants left the UK in the year ending September 2012, similar to the estimate of 339,000 in the year to September 2011.”

So why are people entering the UK? There are lots of reasons, of course. But according to the ONS, “Study remains the most common reason for migrating to the UK.” But if people enter the UK to study, this is unambiguously a good thing. Foreign students bring money into the UK. That this number is so high is testimony to the strength of our universities. This is to be applauded. But, according to the ONS, “In the year to March 2013, there were 206,814 visas issued for the purpose of study (excluding student visitors), a fall of 9 per cent compared with the previous 12 months.” This is surely disastrous news, but such is the attitude towards immigration in the popular press that this worrying trend is barely mentioned.

What about the drain on public finances? OECD data suggests immigration made a 0.46 per cent fiscal contribution to the UK in the most recent year for which data is available.

What about the argument that immigrants take our benefits? Take for example data on Polish Immigrants. It turns out that around 7,000 Poles receive job seekers’ allowance, when there are in the region of 500,000 Poles in the UK. Does that strike you as a high number?

According to the Department of Work and Pensions, “As at February 2011, 16.6 per cent of working age UK nationals were claiming a DWP working age benefit compared to 6.6 per cent of working age non-UK nationals.”

Then there is the rather old argument that immigrants take up hospital beds; that the NHS cannot cope. Well does this argument lack joined up thinking or what? Is it not the case that immigrants are an important source of labour for the NHS?

The truth is the UK has always been a country of immigrants. From the Anglo Saxons, to the Vikings, to refugees fleeing from the French revolution. Many of our kings and queens were immigrants too. Richard the Lionheart couldn’t speak English. King George I and II were German through and through. Prince Philip is Greek; Prince Albert was German.

Isambard Kingdom Brunel was the son of a Frenchman. The man who did more than anyone to define British classical music, Handel, was an immigrant. And coming up to date, perhaps the most important British innovation of the last decades was the discovery of graphene, by Andre Geim and Konstantin Novoselov at the University of Manchester. Both men were Russian born.

In the world of sport, where would British success have been in the last Olympics if it had not been for Jessica Ennis, whose father was a Jamaican born immigrant, and Mo Farah of Somalian birth?

Immigration is not always a good thing. The UK is small country and its capacity for accepting many more people is limited.

On the other hand, the UK, like much of Europe, faces a major demographic shock, as its indigenous population ages. Immigration may be all that stands between the UK experiencing a Japanese style lost two decades.

The real issue here, however, is that we rarely hear the pro-immigration arguments. Instead we send a van around East London, telling immigrants to go home. This is just plain nasty, not to mention utterly bizarre.

Many of the tabloid newspapers have become mouthpieces for the anti-immigration lobby.

David Cameron is courting the anti-immigration lobby, trying to score cheap points by saying: “We hate immigrants more than Labour.”

Our leaders are failing us. Mr Cameron is an intelligent and decent man, who is letting opinion polls dictate policy over his true beliefs. Tony Blair made the same error. At least that was one crime that we could never have accused Mrs Thatcher of committing.

Right now, our leaders should be leading, correcting myths, and promoting an objective discussion of this incredibly important topic. Instead they ride the surf created by an increasingly hysterical media, and it is very, very dangerous.

© Investment & Business News 2013

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House prices might be rising in the UK, but that is not what’s happening across most of Europe.

According to new data from the EU Commission, house prices across the Eurozone fell 2.2 per cent year on year in the first quarter of this year. Across the EU they fell 1.4 per cent.

Among the Member States for which data are available, the highest annual increases in house prices in the first quarter of 2013 were recorded in Estonia (+7.7 per cent), Latvia (+7.2 per cent), Luxembourg (+4.3 per cent), and Sweden (+4.1 per cent), and the largest falls were seen in Spain (-12.8 per cent), Hungary (-9.3 per cent), Portugal (-7.3 per cent), and the Netherlands (-7.2 per cent).

In France they were down 1.4 per cent. They fell 5.7 per cent in Italy, 3.0 per cent in Ireland, and 0.4 per cent in Cyprus.

The latest data for Germany is not yet available, but in Q2 2012 they rose 2.3 per cent, year on year.

According to recent OECD data, when comparing average house prices to rent, they are 71 per cent above the historic average in Norway, 64 per cent more than average in Canada, 63 per cent more in Belgium, 61 per cent in New Zealand, 38 per cent in Finland, 37 per cent in Australia, 35 per cent in France, 32 per cent in Sweden, and 31 per cent in the UK.

Prices to rent are below the historic average in the US, Japan, Germany, Italy, Czech Republic, Greece, Ireland, Iceland, Portugal, Slovak Republic, Slovenia and Switzerland. In the case of Japan, Germany, Greece, Ireland, Portugal and Slovenia they are less than 80 per cent of the average relative to rents.

© Investment & Business News 2013

The rich get richer and the poor get poorer. It sucks, but that is the way of the world. At least that is what most of us assume, but data from the ONS out this week suggests this may be wrong.

Since the start of the economic downturn in 2007/8 the richest 20 per cent of households have seen disposable income fall by 6.8 per cent, the poorest 20 per cent have seen income rise by 6.9 per cent.

It is important that we point out what we mean by disposable income at this point – it’s after taxes and benefits. The ONS has included VAT in the equation, by the way.

In 2011/12 the richest 20 per cent – before taxes and benefits – enjoyed income of £78,300, which is 14 times greater than the poorest fifth, which had an average income of £5,400. That is a ratio of 14 to one.

But take into account taxes and benefits and things look different – very different. The top 20 per cent saw disposable income fall to £57,300, while the bottom 20 per cent saw it rise to £15,800. The ratio changes to just four to one.

So what a bunch of socialists the government of the last few years has been. Except they haven’t really.

For one thing, the data does not tell the full story. It does not tell us about average income in the top 1 per cent quartile.

Besides if you drill down, things look different. If you look over a much longer time period, say from 1977, a quite different picture emerges. Since 1977, disposable income for the bottom 20 per cent has risen by 1.93 per cent, and by 2.49 per cent for the top 20 per cent.

There is in any case a more noticeable gap between the top 20 per cent and the rest of the population.

Average disposable income for the second poorest 20 per cent was £21,373 in the last financial year, or 1.35 times more than the first 20 per cent. Average disposable income for the middle 20 per cent was £27,526, or 1.29 times the average for the second poorest. Average disposable income for the second richest 20 per cent was £34,437, or 1.25 times the average for the middle 20 per cent. And average disposable income for the richest 20 per cent was 1.66 times the second richest.

But then again, so what? Don’t the rules of numbers mean that the average of the top 20 per cent will always be much higher than everyone else for the simple reason there is no upper limit to the top 20 per cent. The lowest disposable income can be is zero, the highest is… well, it’s infinite. Instead let’s look at how things have changed.

Equivalised disposable income, by the way, means: “The total income of a household, after tax and other deductions, that is available for spending or saving, divided by the number of household members converted into equalised adults; household members are equalised or made equivalent by weighting each according to their age, using the so-called modified OECD equivalence scale.” See: Glossary: Equivalised disposable income

And by the way just one more point. The proportion of people in the bottom 20 per cent who are retired has fallen over this time period. . This is because retired households have seen incomes growing at a faster rate than those of non-retired households.

© Investment & Business News 2013

“The existence of tax havens, coupled with high mobility of capital, means governments are constrained in the tax rates they could otherwise apply – crucial for both wealth and job creation,” or so says the Institute of Economic Affairs.

These are brave words, given the current climate.

The Institute also said: “Without tax havens, big businesses would move away from the UK. If tax havens could not be used by multinational corporations in the UK, then a single rate of corporate tax would have to be set. If set too low, then corporations’ contribution to the overall tax take would fall. If too high, then business would move overseas, damaging the overall economy.”

And: “without tax havens, many innovative products would be stifled by punitive tax regimes. Offshore tax havens allow the UK to make the most of its comparative advantage in financial services and avoid potentially damaging double or triple taxation on investment returns.”

Maybe so, but remember corporate profits to GDP have hit an all-time high. You can’t blame companies for trying to squeeze wages, but when they all try to do that, the result is less demand across the economy, which in turn is bad for corporate profits in the long term.

Surely, we need higher corporate taxes across the world, not lower ones. Tax havens, however, are a distraction from the bigger issues. What we really need is for some kind of international agreement that any country wishing to participate in global trade to be required to sign up to a minimum level of corporate tax.

© Investment & Business News 2013

According to the OECD, US household gross debt to gross disposable income had fallen from 130.7 per cent in 2007, to just 107.9 per cent at the end of 2012.

According to the Fed’s latest US Financial Accounts, debt as a share of disposable income has fallen to 110 per cent, from 112 per cent at the end of last year.

At the same time US house prices have at last begun to rise, and both the Dow Jones and S&P 500 have recently hit all-time highs, which has pushed up the value of US assets. Paul Dales, Senior US Economist at Capital Economics, put it this way. He said: “The ratios of debt to net wealth and debt to assets have fallen to rates more in line with long-term trends.” He explained further: “Every $1.00 of debt is now backed by $6.30 of assets, whereas before the recession it was backed by $4.80 of assets.”

Okay, returning to OECD figures, US household gross debt to gross disposable income was just 96.4 per cent in 2000. So in comparison to that year, debt is still quite high. But the trend is clear. US households have seen their own balance sheets improve markedly.

When you think about it, the above data illustrates why the economy has struggled so much in recent years. Despite interest rates being at record lows, US households have engaged in some pretty drastic deleveraging. Economists who failed to spot the crisis in the making during the mid noughties, failed to grasp that US households had simply run out of puff, and that the combination of falling house prices and over indebtedness meant an extended period of readjustment was inevitable.

This adjustment may have a couple more years to run yet. But it is not unreasonable to assume that by the midpoint of this decade, the US consumer will be able to lead the US economy into a new growth period. In combination there are signs of companies moving their manufacturing back to the US, which is a trend that was predicted by the Boston Group some two years ago. Both Apple and Google, for example, have recently announced new products which, just like Bruce Springsteen, will be made in the USA.

In the UK we are seeing something similar, but on a smaller scale. UK household debt to income has fallen too. In fact it has fallen even more sharply than in the US, but then again it was much higher to begin with. OECD figures indicate that UK household gross debt to gross disposable income was 146 per cent at the end of 2012, around 25 percentage points down on the 2007 high, but still among the highest levels in the OECD. Maybe the OECD data is simply telling us the UK deleveraging process has longer to run. If the US will enjoy growth like it used to in 2015, maybe in the UK we will have to wait until, say, 2017.

But it is interesting to note that Tim Abbott, managing director of BMW UK operations, has forecast that the UK will be producing more cars than France by 2018, moving it into second place for car production in Europe.

So this is good news, albeit that the time frame is more stretched that we might prefer.

But good news can create bad news, and that is what the markets are worrying about. To find out why, read the next piece.

© Investment & Business News 2013

UK house prices may be rising again, but they are still too expensive. Or so is the inference from data published by the OECD this week.

In fact, suggests the OECD, UK house prices to rent are 31 per cent higher than the historical average since 1980, and to income they are 22 per cent above average. That may seem a tad worrying.

But then again in Canada, average prices to rent are 64 per cent over the Canadian long-term average, and price to income is 30 per cent over average. In Australia the extent of apparent over valuation is 37 and 21 per cent respectively.

The OECD data suggests that house prices are also more over-priced in Belgium, Norway, and Sweden than they are in the UK.
In France and Sweden, the ratio of price to rent and income, is at a similar level to the UK.

They are much cheaper in the US, Germany, Japan, and Ireland. Okay, as long as interest rates are so low, maybe house prices could be affordable in the countries where they are apparently overvalued. But what will happen if interest rates rise?

If interest rates go up because the economy is doing well, then that may be fine.

But supposing they rise because of external factors, for example because of rising wage costs in China, or because there’s less money sloshing around global money markets, or rates rise because as the baby boomers retire, they draw down savings. See: the Great Reset 

© Investment & Business News 2013