MPW Chartered Accountants

MPW Chartered Accountants

Stock market
Oil
UK economy
US economy
EU economy
Interest rates
Exchange rates
Housing market
Inflation
Unemployment
Company pensions
Prosperity poll

Stock market

All the major London stock market indices reached new year highs on 17 June, the FTSE 100 index gaining 37.5 to close at 4,190.4. Although all indices had been creeping up gradually, the benchmark FTSE 100 was particularly stable, trading within a tight range over the previous fortnight.

However, news that the "Baghdad bounce" in the economy had lost momentum put the recent surge in the stock market abruptly into reverse on 19 June, with the FTSE 100 dropping 75.5 points to 4,131.5, and by the end of the month the index had slipped back to 4,031.2, having closed at 4,048.1 on 31 May.

Oil

The first crude oil to come out of Iraq after the war has been awarded to six companies, including the US refiner ChevronTexaco. Others to benefit are Repsol and Cepsa (both from Spain), TotalFinaElf (France), Tupras (Turkey) and ENI (Italy).

The distribution allayed fears that the US and Britain would mop up Iraqi oil because of their prominence in the war. The US will receive 4 million barrels of crude, while 5.5 million will go to Europe. Despite French opposition to the war, TotalFinaElf was awarded 2m barrels.

A total of 52 companies submitted bids, but three were disqualified for not being refiners.

UK economy

The British economy slumped to its lowest rate of growth since 1992 in the first three months of the year, according to Government figures.

Revised GDP figures showed that the economy grew at just 0.1% in the first quarter, rather than the 0.2% previously estimated, down from 0.5% in the last quarter of 2002 largely as a result of a slump in household spending, which accounts for two-thirds of GDP, from 1.1% to 0.2%, its lowest rate since 1997.

US economy

Economic growth in the United States rose at a 1.4% annual rate in the first quarter of the year, significantly less than the 1.9% first reported. The downward revision for the first three months was blamed on lower business spending than expected.

A slight drop in unemployment claims was regarded as an encouraging sign that joblessness might have peaked at 6%. Unemployment has risen sharply during the Bush administration, and although the overall rate is still lower than the 7.8% of 1991 or the 10.8% reached in 1982, population increases mean a higher number of people are out of work.

EU economy

The continuing strength of the euro has prompted the European Central Bank to slash its expectations for growth in the eurozone, taking its forecast perilously close to recession. The ECB now expects the eurozone economy to grow by just 0.4%-1.0% this year and only 1.1%-2.1% in 2004. It also believes that inflation will hover around 2% before falling to 1.3% next year.

The downgrade was worse than had been expected following the cut in interest rates a week earlier. In its previous set of forecasts published six months ago, the ECB had forecast growth of 1.1%-2.1% for 2003 and 1.9%-2.9% next year.

The European Union faces a long-term crisis because of its ageing population which could see its share of the world economy cut from 18% to 10% by 2050, according to leading US investment bank Citigroup.

The European birth rate is just 1.5 per female, compared with 2.1 in the US, where immigrants from Hispanic countries tend to have large families. Immigration is also lower in Europe, at about 2% per 1,000 people, compared with 4% in the US. As a result, European population growth has stalled and could fall by 7m to 370m by 2050. The European population is also much older, with an average age of 39, as against 35 in the US.

The situation is most serious in Italy, where the UN forecasts the population could fall by 20% by 2050, and in Spain, where it could fall 10%. Britain is in a better position thanks to its higher birth rate and levels of immigration, and its population is forecast to be 6m higher by 2050. However, not only will the burden on taxpayers rise, the report claims, but there will be fewer to shoulder it as the number of taxpayers per retired person falls from four today to two by 2050.

Interest rates

The Bank of England again held interest rates unchanged at 3.75%. The European Central Bank slashed interest rates by 0.5% to 2%, with Wim Duisenberg, the president of the ECB, warning that the eurozone economy was perilously close to recession

In the US, the Federal Reserve made its 13th cut since January 2001, in taking the rate down another quarter of a percentage point to 1%, a level last seen in 1958 during the Eisenhower administration.

Exchange rates

The ECB's interest rate cut was not enough to halt the relentless upward march of the euro. On 5 June it soared by nearly two cents against the dollar to $1.1847. The pound also rose by over two cents to a three-and-half year high against the dollar at $1.6545.

Exporters, particularly in countries with a big manufacturing sector like Germany, are struggling in the face of a 20% rise in the euro over the past year. The ECB has warned that "a decline in the euro area's external market share is expected as a consequence of the recent appreciation of the euro."

The news from the Organisation for Economic Co-operation and Development that the UK economy is still growing faster than most other European nations, and that interest rates will remain higher here than in the eurozone, helped push the pound higher still on 17 June, with gains of over 0.5p to 69.97p against the euro and nearly one cent against the dollar to $1.6888, the highest for nearly five years.

In the first few months of this year the pound weakened dramatically but has recovered in recent weeks as foreign investors poured money into sterling in search of higher interest than is available in Europe or the US.

Housing market

Statistics compiled by the British Bankers' Association revealed that while lending reached Ł14.7 billion in May, the rise in net lending (excluding redemptions and repayments) grew by Ł4.6 billion, 10% less than the previous month and the smallest increase since July 2002.

For the first time since records began, this year more flats have been built than detached houses. Twenty years ago, flats accounted for just 17% of all new properties, but this year nearly 40% of new properties are flats with detached houses, once holding the majority share, now accounting for just 27%.

The rising number of single-person households, produced largely because of the high incidence of divorce, combined with soaring property prices has resulted in detached homes becoming a luxury that few can afford, at least in England where the average price of a new detached house in has nearly doubled since the property boom began in the mid-1990s, from Ł105,000 to Ł208,000. In Wales and Scotland, where the demands on space are less and the prices are lower, the detached house is still the most popular new type of home being built.

Although flats are becoming more common in England, they are not becoming more popular. A survey by the Nationwide found that for most Britons their dream home is a bungalow.

Inflation

National Statistics announced that inflation was down slightly at 2.9% in May compared with April’s 3% but again above the Bank's target of 2.5% for the seventh successive month.

The Harmonised Index of Consumer Prices, the measure of inflation preferred by the European Central Bank and which Gordon Brown has ordered the Bank of England to use from next year, grew by an annual 1.2%, down from 1.5% in April. It is usually lower as it excludes all housing costs, and for that reason the inflation target is likely to be cut to 2%.

However, these headline rates mask wide variations, such as the soaring rail and tube fares which have pushed travel costs other than motoring up 7.8% in the past year.

Unemployment

The number out of work and claiming benefit rose by 9,700 in May to 950,800, its biggest rise since December 1992. Most of the jobs went in manufacturing, where 134,000 jobs have been lost in the three months to April.

However, there are thousands of new workers entering the workforce, which means that the number of people with jobs actually rose to a record 27.87m, an increase of 242,000 on the year. The British economy has been creating jobs for a decade and has the lowest unemployment of any advanced nation.

Company pensions

A recent study by the Association of Consulting Actuaries found that employers are now pouring half as much into defined contribution schemes as into defined benefit schemes.

The trend for companies to favour defined-contribution (DC) pension schemes over defined-benefit (DB), or final salary, schemes is throwing up a variety of anomalies and apparently discriminatory practices.

Woolworths has announced that new employees would have to work five years longer than existing staff to secure their full payouts under the final salary scheme, and Sainsbury, Safeway, Axa and John Lewis are urging employees to increase their pension scheme contributions.

The majority of big companies have closed final salary schemes to new employees, with just 19% of companies now offer all their staff the option of joining a DB scheme, according to the National Association of Pension Funds.

Many companies that have closed their final salary schemes and opened up defined contribution schemes are considering paying higher basic salaries to those in the DC schemes. There may also be promotion implications where it is in the employer’s interest to promote a member of staff in the cheaper DC scheme over an employee in the more expensive DB scheme.

Employment lawyers believe that defined benefit members with lower increments might be able to make a case for discrimination to an industrial tribunal. Lawyers are also concerned that some companies may be trying to persuade defined benefit schemes members to move to defined contribution schemes, and mis-representing the pros and cons in the process.

Prosperity poll

The latest YouGov prosperity index poll for The Daily Telegraph revealed that less than half of Britons would give up their jobs and enjoy a life of leisure if they had enough money to do so. Only 43% of people said that they would resign if they won the National Lottery, inherited a lot of money or made a fortune, while 41% said that they would continue to do their jobs, but would take longer holidays to enjoy their new fortune.