MPW Chartered Accountants

MPW Chartered Accountants

Stock market
Oil prices
Exchange rates
Interest rates
House prices
Inflation
Unemployment
UK economy
Europe
US economy
Farm Business Development Scheme

Stock market

From a level of 3,927.8 at the beginning of the month, the FTSE closed on 31 May at 4,048.1, having reached a six-month high of 4,083.6 on 29 May. The principal factor underlying the improvement from the low of 3,287 reached on 12 March appears to have been the so-called “Baghdad bounce” following the cessation of hostilities in Iraq, combined with optimistic economic growth forecasts from the Bank of England and the news that inflation in the United States was at a standstill for the second successive month, a situation last seen in 1982.

Oil prices

The first four weeks following the end of the war with Iraq saw the price of oil fall by over $11 to below $24 a barrel, but Opec’s decision to cut supplies in an attempt to keep prices within its target range of $22 to Ł28 a barrel pushed the price of Brent crude over $26 by the end of the month, despite the announcement that Iraq would start exporting oil again by the middle of June.

Exchange rates

The euro continued to strengthen during May, reaching record highs against both the dollar and the pound. The euro’s dramatic rise is largely as a consequence of the deliberate weakening of the dollar to boost the American economy, which has had the effect of dragging the pound down with it. On 27 May the euro surged above $1.18 to close at $1.1872. Against the pound, the euro also soared to a record 72.34p. The dollar has dropped more than 30% of its value against the euro in the past 12 months, while the pound has this year experienced its biggest devaluation since being expelled from the exchange rate mechanism in 1992.

Interest rates

The devaluation of the pound against the euro was a major factor in the decision by the Bank of England to hold interest rates unchanged at 3.75%.

As expected, the Federal Reserve also left US interest rates unchanged, and the European Central Bank refused to cut rates, despite the woes of Germany, where manufacturing output slumped and unemployment rose by to 4.5m, further increasing fears of deflation.

House prices

The Nationwide Building Society reports that house prices picked up in May after grinding to a halt in April. The average price of Ł124,752 reflects a 1.3% rise compared with last May’s 2%, but still gives year-on-year growth of 21.3%.

Although the Nationwide said that the number of people buying a home had fallen to its lowest level for more than two years because of a lack of confidence and over-inflated prices, it predicts a gradual slow-down in growth rather than a 1980s-style housing crash, forecasting a 10% rise for the year.

According to Halifax Estate Agents the number of homes going on to the market so far this year is 15% up on the same period in 2002, with increases recorded in all regions.

Inflation

Higher council taxes kept the key measure of inflation above the Bank of England's target for the sixth consecutive month, according to figures for April from the Office for National Statistics.

However, lower petrol prices helped to maintain RPIX, which excludes mortgage payments, at an unchanged level of 3%. RPI also remained unchanged at 3.1%.

Unemployment

The number out of work and claiming benefits fell by 2,100 in April to 937,000, an overall level of 5.1% of the UK workforce. The unemployment rate in the euro zone as a whole is 8.7%, and 8.9% in Germany.

The number of people with jobs in the UK rose by 47,000 in the three months to March to a record 27.9m, according to the Office for National Statistics.

Average earnings were also stronger than expected, growing 3.4% in the year to March, compared with the 2.8% predicted by economists and the 3.1% growth rate in February.

UK economy

The Bank of England has upgraded its economic growth forecasts on the basis that the recent devaluation of sterling will boost exports. The Bank is now predicting growth of 2.5-3% this year and in 2004, up from around 2.25% in February but still below the Chancellor’s forecast o 3-3.5% for next year.

Inflation is expected stay near 3% for most of the summer, before falling back sharply in response to the declining oil price, and then running at 2.5% for the whole of 2004, in line with Bank's target.

Europe

Germany and France have announced that they are abandoning efforts to balance their budgets by 2006, further jeopardising the euro zone’s Stability and Growth Pact which limits deficits to 3% of GDP.

The German economy has officially fallen into recession for the second time in two years, and will have a €126 billion (Ł90 billion) tax shortfall over the next four years. German unemployment rose for the 18th month in a row in April, to reach its highest rate since reunification in 1990 at 10.7% of the workforce.

The Dutch economy is also now in recession, and economic growth in the rest of the European Union is virtually at a standstill.

US economy

Gross domestic product in the United States rose by an annual rate of 1.9% in the first three months of this year, above the 1.5% originally forecast but well below the growth level of at least 3% estimated by economists as necessary before the economy can be said to be recovering.

However, there is no sign of an improvement in the unemployment figures, the US Labour Department reporting that the number of people claiming unemployment benefits had risen to the highest level for 18 months. The Wall Street Journal claims that the country is experiencing "the most protracted job-market downturn since the Great Depression".

“Understanding the Life Cover Requirement and Marketplace – be efficient and minimise the cost.

This is an area of planning where a great deal of what is done, is by virtue of reaction as opposed to pre planning. It is not perhaps surprising that this is the case yet it is equally true to say that any course of action not properly planned, increases the chances of being compromised.

The whole purpose of Life cover and indeed other areas of protection, is to provide financial means at a time for the dependants of those who would not ordinarily have the assets to do it for themselves. This implies that the level this is to be provided for the dependants, should reflect, the amount that would actually be required in those circumstances. This sounds simple, yet putting this into action can often lead to both under provision and sometimes over provision.

There are two basic levels of requirement in these circumstances, namely a “Capital” requirement and an “Income” requirement.

In terms of the former, this would deal with the area of expenditure not normally provided out of income. The most commonly protected asset here is the House, yet you may also consider a contingency fund for repairs and for example the ongoing purchasing of say a car as some of the basic elements of an assessment. Total this figure, consider the period for which you wish to assure/ protect the person earning and you have your target benefit.

It is usually the latter “income” assessment that is more likely to cause confusion. For example, if you have identified a requirement for an income of Ł1,000 “net” per month for the next 25 years, how much cover is required?

If you select the route of trying to calculate the lump sum required, to produce the income over this term, you are going to have to make the following assumptions;

1) What investment return will be available (at what risk) to underpin the income?
2) How will the likely Tax position affect this?
3) What inflation rate will prevail?
4) How much do you discount from the figure for each year that passes, where no claim is needed to be made?

Ask two Actuaries the same questions and you will only be slightly better off. If you are cautious in your assumptions, then you may over insure, equally the opposite applies.

The nil risk option is to use what is termed “Family Income Benefit”, as this will provide the income amount on a monthly basis for the target amount required. This is Tax free in payment and can be inflation protected. This therefore also highlights the need to select the “appropriate” type of Life Cover.

If this is “old hat” to you, then there is little you need do, other than check the levels at least annually to ensure they are still competitive. Much has changed in the last 5-6 years and real savings can be made.

If this is new territory then you should contact us to review your requirements.

Farm Business Development Scheme

A number of our clients are currently in the process of applying for or receiving the Farm Business Development Scheme Funding via the Scottish Office.

The Farm Business Development Scheme relates to agricultural projects being undertaken to diversify the business from its “normal or mainstream sources of income.

The scheme is fairly wide ranging and the funding available is Ł25,000 or 50% of the project if less than half of the total costs. “ There is additional funding if the scheme is of a joint venture undertaking”.

The application forms will highlight a 3 year business plan based on researched information highlighting the viability of the project and its impact on the environment.

As mentioned above the farm business development scheme covers eight main areas of diversification being as follow: -

1) Alternative agricultural production such as diversification into soft fruit, herb, organic crops, organic livestock, etc.
2) Diversification into Leisure Recreation and Sporting Facilities such as golfing, equine, fishing, mountain bikes etc.
3) Retailing of processed agricultural produce such as farm shop, diary, butchery, etc.
4) Processing of forest products, such as timber building work, fencing materials, wooden furniture, chippings and composted bark etc.
5) Residential letting, being conversion of redundant farm cottages, farmhouse, farm building or any other building.
6) Rural Services, Mobile Catering, Boarding and Livery, Craft Shop, Forestry etc.
7) Diversification into Tourist Accommodation for self-catering, chalets, bed and breakfast, caravan and campsites etc.
8) Diversification into other tourist facilities such as visitor centre, farm walks, wildlife, parks, heritage trails etc.

The above list is an indication and is not exhaustive.

The Farm Business Development Scheme also encourages use of essential training courses in all of the above categories.

The application forms can be applied for to the Scottish Office in Edinburgh quoting the Farm Business Development Scheme. We would be happy to discuss the application of the Scheme and assist in completing the Scheme documentation.