Rogue trader
Europe
Italy
European rebate
Oil prices
UK oil output
Retail sales
Inflation
Interest rates
Tax forecast
Earnings
Unemployment
House prices
Consumer debt
Population demographics
Pension funds
Pensions gap
Public innumeracy
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Stock
exchange Another up-and-down month, as the stock market recovered from September’s 12% drop in value, which contributed to the worst quarterly performance since the last three months of 1987. The FTSE 100 index closed 185.4 points down at 3,721.8 on 30 September, the 4.8% fall joining the ranks of the top ten biggest one-day slides although well short of the 12% crash in October 1987. This one was a reaction to disappointing manufacturing data from the US and continued concerns about the solvency of insurance companies. Reassuring results from US companies and hopes for consolidation in the UK generated a 5.05% increase in the FTSE 100 on 15 October, the biggest percentage rise since April 1992 and third-biggest ever, representing gains of £47 billion, and saw the index climb back above 4,000 to close up 198.7 at 4,130.3, having improved by 11.2% since reaching a six-year low on 24 September. The FTSE 100 index then lost 3.8% of its value on 29 October, dropping below 4,000 for the first time in two weeks, and closing 154.6 points down at 3,935.9 following the previous day’s sell-off on Wall Street and the announcement that the US consumer confidence index was at its lowest level for nine years. Rogue trader John Rusnak, the US trader who cost Allied Irish Banks nearly £450 million, has received a 7½-year prison sentence after pleading guilty in a US court to one count of fraud. Europe The president of the European Commission, Romano Prodi, claimed that the stability and growth pact was too rigid and should allow for a looser interpretation according to the prevailing economic climate. His comments had an unsettling effect on financial markets, increasing fears that any redrafting of the terms could destabilise the euro. The pact, introduced mainly at Germany’s insistence as a means of ensuring that the value of the euro would not be adversely affected by lax fiscal discipline in individual member states, requires national budget deficits to be kept below 3% of gross domestic product, and for member states to achieve a balanced budget by 2006. Critics have argued that the pact has forced governments to raise taxes and cut spending during an economic downturn. France, Germany, Italy and Portugal have all struggled to meet the terms and Germany has warned that its budget deficit is likely to exceed the limit. Italy Stagnant output and falling tax revenues have caused the Italian government to revise their target for reducing the budget deficit, from 2.1% of gross domestic product to 1.5% next year rather than the intended 0.8%. Many independent economists are taking a more pessimistic view, however, and consider it unlikely that the county’s budget will balance by the EC’s deadline, already put back two years to 2006. At 2.6%, Italy’s inflation rate continues to be well above the European Central Bank’s target ceiling, with Italian consumers blaming the introduction of the euro for rising prices and consumer confidence running at a five-year low, fuelling speculation that the ECB might have to cut interest rates to help revive the eurozone economy. European rebate France’s President Chirac has warned that the cost of admitting the ten prospective new members of the EU might require Britain to give up its £1 billion a year rebate, which currently compensates Britain for its big EU bill in comparison to the relatively low receipts from the common agricultural policy. What was subsequently described by Downing Street as “a vigorous exchange of views” ensued, with Chirac accusing Tony Blair of being “very rude”. The French have since said that a UK-France summit planned for December was likely to be scrapped, and it is feared that the row will also have reduced the chances of France agreeing to a UN resolution on action against Iraq. Oil prices The threat of oil and gas operations in the Gulf of Mexico being disrupted by Hurricane Lili contributed to a rise in oil prices on 1 October, with New York crude jumping 55¢ to $31.00 per barrel, and Brent crude up 50¢ at $29.25. Over the next week prices fell as Hurricane Lili abated, bypassing the concentration of oil refineries in the Houston area, and concerns of war with Iraq eases as the United Nations Security Council opposed the US stance and President Bush announced that military action was not imminent. By 8 October, Brent crude was down to $27.90. However, Congress’s approval for any attack on Iraq not to be conditional upon a United Nations resolution prompted a rise in prices, as did speculation that the terrorist bombing in Bali could result in an acceleration of a US campaign against Iraq, but the impact of the Bali atrocity was limited by the lack of any direct threat to oil supplies globally. A sharp rise in stocks of US crude and the prospect of a US compromise over a new UN resolution on Iraq then caused a substantial drop in prices, with Brent crude falling by more than $1 on 21 October. Slow progress at the UN on a weapons inspection proposal for Iraq contributed to a further drop, with Brent crude down another 51¢ at $25.95 on 25 October. Analysts predict that any attempt to oust Saddam Hussein will be swift and successful, and have a limited effect on oil prices, which they expect to fall by more than 10% next year as economic weakness impacts on demand. An average price of $21.75 per barrel was forecast for Brent crude. UK oil output A power failure on a production and storage vessel in BP’s Schiehallion field west of Shetland was almost entirely responsible for UK oil output falling 5.5% in August to its lowest level since March 1992 at 1.8 million barrels per day. Retail sales Latest figures from the British Retail Consortium showed a month-on-month increase in retail sales of 3.4% in September, compared with 6.3% the same time last year. The slowdown was attributed largely to the warm weather. Sales growth for the third quarter was down slightly, registering 4% compared with the previous quarter’s 4.2%. The Office of National Statistics reports that retails sales increased by 0.4% in September, less than August’s 0.7% rise but double the forecast. The year-on-year rise slipped from 4.9% to 4.6%. Inflation The underlying rate of inflation for the year to September was 2.1%, up from 1.9% in August and representing the fastest monthly rise since April, largely attributed to services sector increases where inflation of 4.8% was the highest for nearly ten years. In contrast, there was a 0.9% fall in the cost of goods. The headline rate of inflation, including mortgage repayments, rose from 1.4% to 1.7%, its highest level for a year. The increase in the underlying rate was higher than expected and, although still well below the Bank of England’s 2.5% target, is considered to have lessened the likelihood of an imminent cut in interest rates. Interest rates The Bank of England kept the base rate at 4%, and expectations are that it will remain unchanged into 2003. The Bank’s Governor, Sir Edward George, said that the global economy appeared to be recovering and an increase in interest rates might be necessary to restrict the rate of growth of consumer spending, although he did not rule out a further rate cut first. The European Central Bank also kept its benchmark rate unchanged at 3.25%, blaming the lack of economic growth on high uncertainty, poor confidence and lack of structural reforms rather than the cost of money. Both rates have been at their present levels since November 2001. Tax forecast The National Institute of Economic and Social Research (NIESR) in its annual review estimates that taxation would have to increase by between £16 billion and £20 billion by 2006 to meet the government’s spending commitments. The increases would be in addition to the rise in national insurance contributions due to come into effect from April 2003. The NIESR claims that the Treasury’s predictions for economic growth were based on an over-optimistic 2.1% annual improvement in productivity, whereas the rate of increase had averaged only 1.7% for the past five years. Earnings Figures from the Office of National Statistics show that average UK earnings rose by 3.8% in the year to August. The rates of growth were 3.9% in private companies and 3.4% in the public sector, showing slight reductions of 0.1% and 0.2% respectively on the year to July. Unemployment The latest labour force survey finds that: • The seasonally adjusted claimant count for Scotland rose by 100 in July but fell by 2,600 over the year; • The number of full-time jobs fell by 10,000 from the previous year, although there were 22,000 more part-time jobs. Meanwhile, according to the government’s preferred International Labour Organisation measurement: • Unemployment fell between June and August to 167,000, 9,000 down on the previous quarter; • The year-on-year decrease was 5,000, giving an unemployment rate of 6.5%. House prices Figures from the Nationwide Building Society show Scottish house price rises lagging behind the UK average of 21.7% for the third quarter of 2002 compared with the same period last year. The Scottish rate of increase was 14.5%, with Northern Ireland the only region to record slower growth at 8.5%, and the East Midlands topping the chart with 28%. The Bank of Scotland’s latest quarterly Scottish house price index shows the annual rate of house price inflation in the third quarter as 7.3%, compared with 21% for the UK as a whole. Inverness recorded a 39% rise, the Highlands overall 26%, Edinburgh, Glasgow and Aberdeen 15%-17%, and Tayside a mere 5%. The average price is £68,648 compared with the UK average of £113,035 and £136,700 for Edinburgh. According estate agents Slater Hogg & Howison, house prices for first time buyers in Scotland have risen by 27% in the past year, the average price of a starter home now being £60,190. There is also an average of six prospective buyers for each home. Consumer debt Bank of England figures show that mortgage lending for August fell in terms of both volume and value. At 108,000 the number of new loans approved was down by 8,000 from the average for the previous three months, and total lending of £18.66 billion compared with £19.04 billion in July, although this is still well up on the £14.52 billion total for August 2001. Credit card debt increased by £812 million, compared with a £683 million rise in July, and overall unsecured debt was up by £1.99 billion as against £1.94 billion the previous month. In September total debt rose by £8.9 billion, contributing to a year-on-year increase of 13.1%, the highest monthly rise since records began in 1993. The annual increase in mortgage lending is also at a record 12.4%, up £6.9 billion for the month, with 117,000 new mortgage approvals in September. Consumer credit was up more than expected, the £2.04 billion increase giving an annual rise of 15.8%. Business failures A study by Dun & Bradstreet reveals that in the first nine months of the year 3,823 Scottish businesses went bankrupt or into liquidation, a 10.7% increase on the same period last year. The total of nearly 33,000 for the UK as a whole, up 7%, was the highest for three years. According to the Better Practice Payment Group, late payment from customers continues to be one of the main reasons for business failures, forcing the closure of more than 10,000 businesses a year despite suppliers now having the right to charge penalty interest and fees. Population demographics Scotland’s registrar general has warned that the number of children in Scotland under 15 could drop by 20% over the next 20 years, and with people living longer and retiring earlier, economic analysts predict that these trends will put unbearable pressure on the economy. In the past 20 years, the largest population fall has been in Glasgow City, down 19%, followed by Inverclyde at 17%. Aberdeenshire with 20% and West and East Lothian (14% and 12% respectively) have seen the biggest increases. Data from the last census shows: • A 29% increase since 1981 in the number of people over 75 • An 18% drop in the number of children under 15 • A 23% drop in the 15-29 age group • Pensioners outnumber children under 15 for the first time • Males outnumber females by 196,734 • 65% of pensioners are women (and 78.6% of those aged 90 and over) • Scotland’s population fell by 2.28% since 1981 to 5,062,011 • Scotland is the only country in the UK with a declining population The census figures underline the warning from the Association of British Insurers that Britain is heading for a pensions crisis, with a £27 billion annual shortfall in the necessary level of savings. The cost to the British taxpayer of the state pension has risen by £1.8 billion in the past year, and is expected to rise by £11.5 billion to £47.4 billion in the ten years to 2005-2006. Pension funds A survey by information provider Russell/Mellon Caps indicates that UK company pension funds fell by an average of 15.6% in the three months to September, the worst performance for nearly 15 years. In the same period the FTSE All-Share index fell by 19.3%. Pensions gap According to independent financial advice group IFA Promotion; about two-thirds of the population need to increase their savings by an average of £2,263 a year to avoid retirement poverty. Estimating a current shortfall of £66 billion a year, the group reported that nearly half of people in full-time employment are failing to save regularly and 34% of people have no savings at all. The recommendation from financial advisers is that 15% of income should be saved towards retirement, and that people should maintain a reserve of three months’ pay as an emergency fund. The ratio of borrowings to savings, or savings brake, was 64.5% for the second quarter, meaning that for every £1 saved people borrowed 64.5p. Public innumeracy The Financial Services Authority has warned that people in the UK are not only still extremely ignorant and unsophisticated when it comes to financial matters, but have trouble adding up. The FSA’s managing director claims that “It’s hard to overestimate financial illiteracy among consumers”. |