Low, Lower, Lowest - Global Economics
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Low, Lower, Lowest
Low inflation, low pay and low interest rates characterise the UK’s economic situation, but as China’s central bank cuts its main interest rate the US Federal Reserve has started to talk about raising its own. More Global changes on their way in 2015 that will affect you `big time`!
Low-flation - UK inflation crept up to 1.3% in October. Higher, but still barely above the low of 1.1% reached during 2009. Cheaper energy prices and food costs are keeping inflation low.(but for how long?) This is good news for consumers, who have seen their spending power eroded by rising prices over the last five years. But it is also good news for producers. Manufacturers use a lot of energy and the cost of their materials and fuels have fallen by 8.4% in the last 12 months. No pipeline price pressure here then. The energy companies are still being greedy by over charging, just look at their very high net profit year-on-year!
Loyalty pays - A typical full-time employee will earn £22,000 this year, little changed from 2013. After inflation, spending power is down 1.6%y/y. For people who have been in the same job for a year or more, however, earnings are up 4.1%y/y. While job growth has been strong, the composition of employment is changing. We’re “losing” higher paid jobs and replacing them with lower paid ones. This is another way of saying that a major challenge confronting the UK is weak productivity growth. Fix that and pay can rise. Too many cheap goods entering the UK market put pressure on home manufacturing! Also, many foreign workers will work for far less money they home born UK citizens! Social unrest on its way!
The big picture - UK government borrowing fell to £7.7bn in October, down £200m on the same month last year. But the bigger picture is that borrowing since the start of the financial year in April is up by £3.7bn. That’s going to make it harder to meet the £11bn reduction that was set out in April’s budget. The culprit? Tax receipts, which are lower now relative to GDP than they were in 2008. Weak income tax receipts in particular have been at the heart of the problems for the Exchequer, mirroring the struggle that the UK has had in generating earnings growth . Falling UK tax receipts is a major issue now and in the future!
But at what price? With the quantity of retail sales rising by 4.3%y/y in October, retailers could be forgiven in thinking Christmas has started early this year. Sales rose in all sectors, but particularly in both household goods and department stores, which were up by 10.8% and 8.2%y/y, respectively. Average shop prices fell by 1.5%y/y in October, the largest annual fall since autumn 2002. It's partly oil-price related of course, and as consumers we all welcome lower prices. But it will tend to lower general inflation which, in turn, will lower the pressure on the Bank of England to raise interest rates. More sales are over the internet with falling high street retail sales to continue!
New ideas. Just like GDP, research and development (R&D) expenditure by UK businesses passed the pre-crisis peak last year. In total, £18.4bn worth of R&D was undertaken in 2013, a 6% rise on 2012. The renaissance in the UK motor industry is showing in the figures. It now accounts for 11% of UK business R&D and is the second most important sector behind pharmaceuticals, which accounts for 22%. Computer programming is having more resources devoted to it too. Back in 2002, 7% of R&D expenditure went into this area. Now, it's 11%!
How much is the UK worth? £7.6 trillion apparently, in net terms. This is a measure of the market value of all the financial assets (shares, insurance and pension funds, deposits) and non-financial assets (housing, transport equipment, intellectual property products) across households, businesses and the government in the UK. It equates to £119,000 per person or £289,000 per household. Households and organisations such as charities and universities collectively is the biggest sector and housing is the largest contributor with dwellings worth a whopping £4.4 trillion. Property boom and bust on the way again, so will the net worth be then?
What little difference a year makes. The initial readings of November's Purchasing Managers Indices (PMIs) for the Euro zone and China suggest both economies are still struggling. The Euro zone composite PMI slipped to 51.4 in November and has fully reversed the modest rise it experienced to April this year. Meanwhile China's data continues to suggest over-indebtedness and a worn-out growth model are taking their toll on the economy. The manufacturing PMI is reading just 50, even lower than where it was a year ago. As a result China’s central bank cut its main interest rate to encourage growth alongside more reforms of the financial sector and wider economy. China is heading for major issues in 2015 and beyond which will impact globally!
Preparing the ground. We already knew that the Fed had kept rates on hold when it met in October. Nor will rates rise soon, according to the minutes of that meeting. But the Fed’s mind is clearly focused on the day when rates will “liftoff”. It is actively debating the language it will use to signal changes in policy and what it will say in advance about the likely pace of rate rises. The very fact that the minutes describe these debates is part of the process of preparing us for the first rise. Global rate rises will happen what even the risk!
About the Author Colin Thompson
Colin is a former successful Managing Director of Transactional/Document Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor - RFU Leadership Academy, Mentor - Coventry University, Mentor - The Chartered Institute of Personnel and Development, author/writer Business Advice Section for IPEX, Graphic Display World, NewsUSA, GraphicStart, many others globally, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM/Software/PDF and over 2000 articles and 35 books published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.
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Written and submitted by:
Dr Colin Thompson
Direct: + 44 (0) 121 247 4589
Mobile: 07831 588310
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The Cavendish Academy
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