China In Your Hands

 

In all the excitement / anxious concern / farcical comedy / bewilderment (delete as appropriate) in the EU Referendum aftermath, Donald Trump Presidential Stage Show and the Sam Allardyce 'sting', we have taken our eye off the ball with China.

 

Forget the endless debating on whether you can justify putting the heating on (is it Autumn yet or still Summer?), the merits of what will be left of the Great British Bake Off post Channel 4 transfer, whether ‘Strictly’ is as good as it used to be and how has the very unelectable Jeremy Corbyn got elected as the Labour leader for just one moment……and let’s consider China as we really haven’t shown them the attention they deserve recently.

 

First things first, China is a big deal in world economic terms. They are the second largest economy in the world and will be the biggest over the next 10 years (give or take a few years).

 

However, there are some big concerns as their economic growth has been fuelled by credit and these things don't go on forever. Just look at our own banking ‘readjustment’ in 2008 / 2009.

 

Ken Rogoff  (the former chief economist of the International Monetary Fund) summed things up perfectly recently when he said “a slowdown in China is the greatest threat to the global economy” and a “hard landing for one of the main engines of global growth could not be ruled out”.  

 

The biggest issue is the increasing fear that China's economic boom was based on an unstable credit bubble. Enter UK Banks from stage left……

 

UK banks have $530bn worth of lending and business in China…...that is about 16% of all foreign assets held by UK banks.

 

This will play out for quite some time……let’s hope it unwinds nice and orderly (for once!).  

Bank Statement

 

If I am ever uncertain by the direction of travel of our economy at any given moment, I always look to the Banking Sector for an indication. Given the lack of clues coming from Theresa Mary May on the UK leaving the EU or anything remotely resembling an economic policy coming from the Chancellor of the Exchequer (who is Philip Hammond in case you (forgivably) missed it) currently, I am left with no choice but to seek a guiding light from ‘them lot’ (also known as the Banking Sector).

 

My rationale for using ‘them lot’ as a guide is simply due to the vast importance that the Banking Sector has for the UK economy (it accounts for 10% of UK GDP) and how the Government typically does all it can to protect it……and dare I suggest romance it.

 

Which leads us nicely (and very intriguingly) on to an issue that will confront UK banks post Brexit……

 

In short, UK based banks would lose the automatic right to trade in EU states if the UK left the single market and would strip banks of valuable ‘passporting rights’ that give unfettered access to the EU bloc.

 

Passporting rights are considered by some to be vital to London's position as a financial hub as it allows banks to serve clients across Europe without the need for licences in individual countries. However, if the UK were to leave the EU we are simply encouraging UK based banks to up sticks and move……with the hard cash ‘them lot’ make for the UK going with it.  

 

In the EU corner, Jens Weidmann (head of Germany's central bank) has said that “passporting rights were tied to the single market and would automatically cease to apply if Great Britain is no longer part of the European Economic Area.”

 

In the UK corner (presumably dressed as a clown) Foreign Secretary Boris Johnson has said that “such passporting rights would be preserved even if Britain left the single market after Brexit”.

 

Boris has never been short of words but has lacked conviction with his actions in the past. Let’s hope he’s right on this one or it will hurt ‘them lot’ and the UK economy as a whole.

 

We shall see.

A Sad Pension Perspective

 

I appreciate that the subject of pensions can offer dryness of Sahara proportions and seldom do I get accused of being exciting whenever I bring it up socially. I am boring enough as it is without compounding a listener’s misery further!

 

However, there has been some really interesting insight at the frustrations that Ros Altmann has incurred.

 

Her background is worthy of respect and her opinion is always of value. It is rare that she does not have her finger on the pension pulse. Her background has never been political, as she gained prominence as a pro bono campaigner for consumer rights on pensions and fought more corners against the Government for justice on the subject than she really should have. My cap is doffed.

 

Last year from left-field, she was appointed by then Prime Minister David Cameron as Pension Minister. However, such is her drive for fairness, she quit her post within a year.

 

Never one to back out of giving an opinion, she offered the following (and very concerning ) observations of her time as Pension Minister:

 

“It was a truly shocking experience. If you are a minister who actually wants to get things done, you have to fight constantly. The whole system seems geared to stopping ministers from trying to do too much and from engaging properly with the public or indeed the media. If I spoke to journalists directly, without prior permission or officials present, the whole machine would come down on me like a tonne of bricks.”

 

“Officials and other departments can also often prevent policy being made in the interests of the public. Much of my time was spent fighting to stop bad policies being pushed through, leaving less room to push better policies forward.”

 

“The bottom line is that I have seen how short-term political considerations can derail sensible long-term pensions policymaking. Trying to fight from within is like swimming against a tide, as urgently needed policy proposals are often rejected in favour of shorter-term political expediency.”

 

Pensions by their very nature are long term yet it is evident from Ros Altmann’s observations that they will not be used for anything other than short-term political point scoring.

 

Is it really any wonder that there is so little trust in pensions as a legitimate savings medium?

 

Perhaps the biggest question though……what’s in it for MP’s to change the culture and create solid long term pension policymaking when they are only ever guaranteed to be in position for 5 years?

 

All in all, very sad.  

Apple Tax Haven

 

 

It’s fair to say there has been quite a kerfuffle regarding Apple, their European HQ in Ireland and their tax treatment (or lack of it).

 

The basics of the story are that Ireland charges 12.5% Corporation Tax but did a ‘deal’ with Apple to give it a lower preferential rate to attract their European HQ to Ireland (and all the jobs and prosperity that came with it).

 

All is fair then……well, not in the eyes of the EU. It seems they have a bee in their Euro bonnet about a state sponsored preferential tax rate and have ordered Ireland to apply their normal tax rate and recover a whopping €13 billion in back taxes from Apple.

 

To put the preferential rate in perspective, Apple’s Corporation Tax rate was reduced from 12.5% to 0.005%......or to put that another way……€50 tax for every €1 million of profit. No wonder the European Commission got its knickers in a twist.

 

This is damaging for Ireland as it hits its international reputation and will make it less attractive as a destination for foreign direct investment. As for Apple, that’s a big old chunk of money for it to find and it will hit profits.

 

There is a winner though……the UK.

 

As Theresa Mary May informed us yet again last week, “Brexit means brexit”. Which means the UK should be grinning at the prospect of being able to offer Apple and its likes the same sweetheart deals with there being nothing anyone can do about it. Well, when we leave the EU that is.

 

Maybe, just maybe (say it very quietly) this Brexit thing might just offer a few perks.

 

Interesting.

Economic Nuclear Winter?

 

It’s fair to say that the first half of 2016 has been a rollercoaster for investment markets. An oil price crash, China being China, the U.K.'s vote to leave the European Union and weaker than expected corporate earnings results across the region has created a cocktail of uncertainty for the second half of the year.

 

Whilst our focus will be on the new Government at Westminster, the economic stimulus action they take (or not) and their plans for firing the brexit gun, perhaps our attention would be better focused on the banking sector as our ‘yard stick’.

 

You see the banks are a bigger deal in many ways than the Government as they only have tax and spending cuts to play with in reality. Whereas the banking sector is the oil that keeps the economy turning by providing the cash for businesses to survive and thrive, provide consumers with money they don’t have so they will still spend (we are a consumer driven economy after all) and they account for £1 in every £10 made in the UK as a whole. The banking sector is a big deal.

 

So rather than focus on Westminster for a guide on the direction of travel over the next 6 – 9 months, it is the banking sector that perhaps gives us the best clues……and it is fair to say UK and European banks are preparing for the worst and a very tough six months ahead. 

 

The current uncertainty over when the U.K. will start the process of quitting the EU has banks on tenterhooks as most banks are multi-national with operations across the UK and Europe. Banks are now preparing for an economic nuclear winter and have strategies in place that take into account the worst case scenario that could happen by the end of this year.

 

What does worst case look like? A hardy mix of Article 50 being triggered, referendums in other European countries leading to a break-up of the Euro and Sterling plummeting further against the Dollar.

 

All scary stuff but there is a balancing argument that really should be considered……Brexit could be organised, orderly and with all parties happy with the terms, referendums in other EU countries can take years to organise and Sterling may hold up well against the Dollar as a consequence.  

 

Time will tell……the one thing for sure is that there are uncertain times ahead as we are in unchartered waters.

Not Catching A Cold Any More?

 

It’s fair to say that the UK is pretty much obsessed with the USA, its politics, its economy and all things that could impact our back-pocket. Just look at the exposure that Donald Trump and Hilary Clinton had on UK TV, radio and social media in their recent political sparring……and that’s before they go at it for the Presidency in November. Expect nothing other than 24 hour coverage.

 

The expression used to be that when America sneezes, the UK catches a cold, such is the importance of their economy to the UK……times might be changing though.

 

All eyes have been on the Federal Reserve (think Bank of England with a strange accident) this week to judge if interest rates are likely to rise in the USA. What was interesting in the minutes of their recent meeting was the reference to the UK. In fact, not just a reference but clearly quoted opinion on the UK economy over 20 times (mainly due to Brexit).

 

So are we a bigger deal than we thought in the USA? Well, it certainly caused the Federal Reserve to split its vote and not raise interest rates……that’s big enough a ‘deal’ in my eyes.

 

We perhaps should remember that when we are at the negotiating table with our American cousins……we no longer need to be the nodding lap dog that too many UK Governments have been over the years.

 

Interesting times.

Message Received Loud & Clear

 

All the talk of the Bank of England, Mark Carney, macroeconomics, interest rates, et al over the last few weeks means little to the masses until it is delivered in a medium and message that actually matters to them.

 

Enter Santander and their 1-2-3 account.

 

The 1-2-3 account heavily marketed by Santander is a juggernaut in the bank savings world as the interest rate has been market leading for years. However, it announced this week that it is cutting the interest rate 3% to 1% on the back of the Bank of England reducing its base rate. In Olympic terms……it is Jessica Ennis-Hill going from gold to silver……still good and a commendable effort but not as good as before. 

 

The initial message to anyone with a Santander 1-2-3 account is not to switch in anger now because the 3% interest rate holds until November.

 

However, the bigger message should be one of concern for savers. With inflation rising and savings interest rates falling, there is the real prospect that the safe haven of bank based savings could actually create a loss for savers in real terms. Or to put that another way……the interest rate being lower than inflation.

 

Now imagine if interest rates turn negative and you have to pay for a bank to hold your money for you whilst inflation keeps rising……it’s a car crash waiting to happen. (see my previous blog 'Bank of Mattress'

 

 

All in all, savers earning less interest can only have a detrimental impact on consumer confidence (and in turn the economy).

 

Not good.