Economic review of October 2007

A strong October for markets (Data compiled by the Insurance Marketing Department Ltd)

The fact that this so called mid-cap (middle capitalisation) sector was a month behind the larger FTSE100 (made up of the UK’s largest 100 companies) in recovering should not necessarily be seen as a downside. The two have often moved differently as can be seen from the graph, which show monthly movements for the last year.

The FTSE100 itself increased by a creditable 3.94% during October, giving it a year-to-date growth of just over 8% and the AIM market was 2.94% up over the month, producing a year-to-date growth of just over 9%.

Elsewhere, the US Dow Jones only managed 0.25% during October, while the Nasdaq100 did rather better at 5.83% . Even the Japanese Nikkei225 managed a 0.5% rise, while the main Eurostoxx50 was up 2.47%

It is a matter of concern that sterling had risen by 2% against the US dollar even before the Federal Reserve’s 0.25% rate cut was announced on Thursday. This is not good news for the UK’s exporters, although consumers and those taking foreign holidays will benefit.

Brent crude 1-month oil futures hit an all time high of US$90.63 a barrel at the end of October; up 14.48% up on last month and almost 50% higher than at the start of 2007. Rising fuel costs could have implications for inflation.

Pre Budget Report

Changes to capital gains tax proposed within the PBR are discussed in a separate article, please click here to view

Interest rates

Interest rates held steady throughout the major economies during October, despite recent market volatility, with the important exception of the US, where the Federal Reserve cut a further 0.25% (following it half percentage point reduction last month) in an attempt to kick-start its flagging economy. This could also have the effect of easing the squeeze on those who have borrowed in America’s “sub-prime” housing market. Should this result in fewer defaults (which is by no means certain) markets could benefit.

By the time you read this, we will know whether the Bank of England has also cut rates. Not to do so could push sterling even higher against the dollar, which is bad for our exporters; but to do so could fuel house price inflation. According to Nationwide this is already on the horizon, with October’s annual price change up 9.7%, compared with 9% in September.

Population Growth

As has been widely reported in the newspapers, the UK population is forecast to reach 71 million by 2031 largely on the back of increased longevity and immigration. In fact, latest figures show that 8% of the workforce is foreign, at 1.1 million (rather than previous official estimates of 800,000).

It could be argued that immigration is part of the solution, rather than a problem. According to the Sunday Times (28th October) the dependency ratio (that is the proportion of dependants to those of working age) is set to rise to 74% in 50 years time. But if there were to be no net immigration, this would actually rise to 82%, partly because immigrant workers have fewer dependents. As such, they are net contributors to the economy; the last government figures available (from several years ago) show a positive balance of £2.5 billion a year and the figure is likely to be even higher today.

This will, however, have a major impact on housing and recent reports suggest that much more accommodation will need to be built than had been planned, to accommodate family break-ups and growing numbers of new workers. On the positive side, inflation may benefit from a further influx of overseas workers, as they tend to earn less than their UK born counterparts.

This country has a long history of welcoming people from overseas, many of whom have made significant contributions to our culture and wealth. Nevertheless, this is an island and long-term overcrowding could become an issue.

China – the ultimate tiger economy?

Our attention keeps being drawn back to China and its impact on world markets. Walking recently through a leading UK retail outlet demonstrated that a large number of goods are being imported from China which might previously have come from closer to home, When one considers the cost of transport (in both financial and ecological terms) this is deeply worrying. Of course world trade is good. But consumers’ insistence on low prices is leading to us importing from countries where workers are paid less and attention to safety is scant; recent product recalls of toys are evidence enough of that.

China has a huge foreign exchange surplus, based on a massive export programme and has recently overtaken the UK as fourth largest economy in the world. Indeed, according to International Monetary Fund projections, China will pump more new money into the global system this year than the US. Add this to the growth of Russia and India and the balance of world trade – and power - is certainly shifting. Whether this is a threat or represents a “happy handover” of economic leadership is yet to be seen. But the UK needs to think very carefully about how it earns its living in future.

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