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Economic review of November 2007 
UK interest rates look set to fall which is good news for the economy generally although savers may not think so if banks continue to slash rates earlier and harder than the Bank of England does. The case for cutting rates is that sterling is far too strong and lower interest rates could also help boost our exports - particularly to USA and dollar denominated economies. Interestingly, deputy governor of the Bank Rachel Lomax has already flagged the possibility of a cut in December, although this could have been a move to scare currency traders with the prospect of a fall in sterling’s value, in the hope of heading off the need for a cut before the Bank is ready. (Conspiracy theorists, please take note!) One fly in the ointment is MPC member Paul Sentence, considered to be something of a hawk, who has said that the high price of oil could make a rate cut less likely, because the threat to world economies it represents is greater than a little deflation. (In fact the Bank was unable to resist pressure for a cut and we now know that the rate was reduced to 5.5% in early December.)
Northern Rock 
This story seems set to run - and not just because so many commentators say that the credit crunch has not yet finished biting. However, equity markets are clearly aware of this and, despite having discounted the potential impact of more “bad” news, are not doing too badly. Sir Richard Branson’s offer to bring it within the Virgin fold looks promising, but there is some concern that only £10 billion of the taxpayers’ estimated £26 billion lent to the company will be repaid immediately.
Conversely, Virgin has a strong track record and Northern Rock claims to have adequate assets. The north east needs major employers following the demise of its traditional heavy industries. The fact that this area has experienced significant economic growth is largely due to the activities of major firms such as Northern Rock. The ongoing survival of this bank should be a priority for us all. Markets (Data compiled by the Insurance Marketing Department Ltd.) Equity markets had a poor month, although most showed signs of recovery during the last week of the month. But this is not an immediate cause for concern despite the usual clutch of “Cassandras” predicting a massive correction. What matters in long term markets is the underlying strength of companies and while economic slowdown might hurt some, most are highly resilient.The FTSE100 ended November 4.3% down, leaving it 3.4% up for the year-to-date, having only just avoided dipping under 6,000 points on 22nd November. The FTSE250 similarly lost some 7.86% on the month but was on the way back up having fallen 10% earlier in the month. Elsewhere the Dow Jones lost 4.01% and the EuroStoxx50, a more respectable 2.11% during November. With the exception of the Nillei225, the AIM and FTSE250, the main markets we track are still up on the year-to-date. Good news is that oil has fallen back by 2.62% during the month to US$88.26 per barrel for Brent crude 1-month futures, having peaked at more than US$95 during the month. House prices are also on the decline with Nationwide reporting the first fall in house prices (0.8%) for 21 months and an annual growth rate down to 6.9% from 9.7% in October. Inflation Retail price inflation at the end of October was standing at an annual rate of 4.24%, up from 3.95%. Consumer price inflation was also higher than September, at 2.03% - once again above the Bank of England’s target. But it is important recognise that a degree of inflation is not necessarily a bad thing; it is, of course unhelpful to those in fixed incomes, but it can lead to higher interest rates, which favour savers. It can also, if at a reasonable rate, be a stimulant to economic growth and – however much we may not like it – naturally generates more tax revenue. As incomes rise – for both individuals and businesses – the Chancellor naturally gets a larger slice of the action. (At least this is less painful than when tax rates go up.)
Inflation is, of course, made up of a basket of factors for the “average” consumer. As a result, factors such as the cost of oil and an alarming rise in the cost of food impact heavily, while other factors such as school fees which affect only some families do not feature in the headline rates. This means that the inflation rate for every family will actually differ in practice. For example, consumer electronics are falling in price all the time, but only those who purchase such items included in the “RPI basket” benefit. In the US, its current account (or balance of trade) has declined from ‘par’ to a deficit of $800 billion
One indicator of potential trouble ahead is that luxury recreational vehicle maker Winnebago is expected soon to be reporting a sales slump; during the past 30 years this has invariably been harbinger of a slowdown in the US economy. Men are living too long This is not apparently the cry of aggravated wives, but a concern that the cost of up to 12 years longer life expectancy amongst men could cost as much as £160,000 per person, split between government and pension funds. Actually, the figure may not be so high because later retirement will reduce the time spent in retirement, but this certainly calls into sharp focus the need for personal provision for old age.
The current ‘debate’ in France about overly generous pension schemes that allow some people to retire on full pensions at age 55 shows that we are not alone in facing this challenge. But with £620 billion worth of public sector pensions in the UK threatening to cost every family here £30,000 over the coming years, something needs to be done to redress the balance. If you require any further information about the services that we provide or would like to review your financial planning position, please contact us |
(6% of GDP) over the past 16 years. In the UK, our current account deficit had fallen to ‘only’ £9.1 billion (2.6% of GDP) at the end of the second quarter. But with retail sales growth having slowed to just 1% year-on-year and the economy as a whole set to slow to anything between 1% and 2.25% depending on which forecast you look at and what happens to interest rates, we could be in for a bumpy ride.