The impending crises the politicians won’t tell you about
Another week, another growth downgrade. Just how bad is the economy?
One thing’s for sure, politicians won’t tell you. They refuse to discuss bad news in case they “talk down the economy”.
Just look at the recent Greek crisis. Even as Papandreou was frantically negotiating a default the European Commission refused to admit Greece was in trouble. JP Morgan likened the phases of denial, anger, bargaining and depression to the Kübler-Ross stages of coping with a bereavement.
Today there is a long list of problems which our elected representatives don’t want to talk about. So we thought we’d break the silence with a compilation of all the woes and ills facing our economy.
Add ’em up and you can see why Mervyn King and his wise men are starting to panic.
1. Italy, Ireland, Portugal and Spain are going to default
Greece is just the start. Italy is “mathematically beyond point of no return” says Barclays Capital. And what about the other PIIGS? FX trader Alex Hope says, “European countries that will default on their debt are Greece, Portugal, Ireland, Spain and Italy for sure. With Italy equalling the size of Greece, Ireland and Portugal times two in size, it’s going to be more horrific of a default.”
And France? Ever cheerful Gordon Brown says our Gallic pals “will be the next to crumble”.
2. Inflation is inflating
The Bank of England’s quantitative easing is going to hurt in the long run. How painful? Jupiter income manager Tony Nutt forecasts inflation will hit eight per cent in 2015. Henderson chief economist Simon Ward says: “To reach eight per cent by 2015 is a bold forecast but it is not unrealistic.” Well, CPI is already at 5.2 per cent.
3. The winter of discontent
The trades unions are having their big day out on 30 November. A full scale national strike will gridlock London. The mood is so grim even the National Association of Head Teachers is on strike, the first such action in its 114 year history. With Bob Crow on the warpath you can bet this is just the first in a long series of large scale demonstrations.
4. Private sector pensions are gravely underfunded
The deficit faced by UK private sector pension funds fell to a mere £159bn at the end of October, according to the Pension Protection Fund. Currently there are 5,175 private pension schemes in deficit, and just 1,358 in surplus.
5. New bank rules will starve small firms of capital
Basel III banking requirements place additional capital requirements on banks. This is reducing the banks’ ability to lend to small and medium sized businesses. Tim Ambler’s paper for the Adam Smith Institute How Basel III threatens small businesses gives the gory details. And as Lord Turner, chairman of the Financial Services Authority, admitted last week, there’s nothing we can do about it.
6. Youth unemployment is horrific
The number of under-24s claiming jobseekers allowance rose 94 per cent in the North East and Yorkshire over the past six months. One in five British youths is now neither in work nor education. On the Continent things are worse. Youth unemployment in Sweden is 25 per cent, Ireland 28 per cent, Slovakia 33 per cent and in Spain a barely plausible 45 per cent.
7. The Luddites were right
Economists Erik Brynjolfsson and Andrew McAfee’s new book Race Against The Machine explores the way machines are taking over more and more of the economy. As our robot cousins assume control there are winners and losers – the losers being the low-wage, low skill workers who are rendered obsolete. Taxi drivers, for example, face competition from automated driving systems. The profound cultural and economic shifts in this man-versus-machine contest will be dramatic, and possibly traumatic.
8. Life expectancy increases are undermining pensions
The pension industry relies upon long range life expectancy forecasts. Trouble is, the forecasts are always too low. Last month Mercer observed that the FTSE 100 firms were forced to increase their life expectancy forecasts by another four months, bringing total forecast revisions to an extra 2.5 years since 2005. New medicines and stem cell treatments may mean current forecasts are hopelessly inaccurate, as LondonlovesBusiness.com recently pointed out.
9. Interest payments on the national debt are rocketing
A monster is devouring UK government spending: interest payments on the national debt. This year interest payments will be £48.6bn, up from £27bn in 2006/7. Interest payments are forecast to hit £75bn by 2015. So when people like Alan Bennett complain about libraries closing (“it’s child abuse”), that’s the real cause.
10. The Robin Hood tax may get imposed
This is the tax which would cut growth, ruin the financial services sector, tax pensioners and have a negative tax raising impact. We’ve debunked it. The ASI has debunked it. Even the European Commission has destroyed the economic arguments for it. Yet Sarkozy and Merkel still support this mad tax. William de Lucy, managing director of Amplify Trading, tells us: “It’s bonkers. Europe would be self-imposing poor competition on itself. Trading would just move to New York or Singapore.”
11. China hasn’t declared its “nasties”
The ultimate bubble? Can an economy really grow at double the normal rate for 30 years without any setbacks? Clem Chambers, founder of share trading site ADVFN.com, is one of the p
essimists. He tells me: “China isn’t as invulnerable to US and European recession as was first thought. When the credit crunch started China binged on stimulus, propping up their economy by printing and huge sums of money; building whole cities in wastelands and bridges-to-nowhere.
“Manufacturing growth has been seen as China’s unstoppable engine for growth. As the US and Europe suffer from debt crises, the impact on the manufacturing juggernaut is already being felt as demand falls, leaving local governments and banks effectively bankrupt.
“What is more, Chinese stocks that have listed in China have recently earned a very bad reputation as more than a few have turned out to have published unreliable financial statements. Fraud is suspected in a number of companies – so many in fact that it has cast a pall over the whole sector of Chinese companies listed in the US.”
12. Eurozone breakup?
Vince Cable says Greece leaving the Euro would mean “economic Armageddon” for Britain. And it’s Armageddon if it stays in. So, er…
13. Energy costs keep going up
Energy costs are rising, up 15 per cent this year. On top of these we have green taxes being cooked up by energy minister Chris Huhne. Industry is already squealing. Last week the British Plastics Federation president Philip Watkins demanded an investigation into prices. BP has forecast energy demand will rise 40 per cent by 2030, the equivalent of adding two current-day Chinas. If supply can’t rise with demand, prices will continue to hit new highs.
14. House prices are still falling
Low interest rates have insulated many mortgage owners from economic reality. Over the next three years prices will need to undergo the a long-overdue correction. Savills is forecasting residential property fall of two per cent next year, with falls of four per cent in Scotland. Knight Frank is forecasting a fall of five per cent next year and no growth until 2014.
15. The European bailout mechanisms are a farce
The European Fund Stability Fund has Euro 440bn to deal with a rescue package requirement of Euro 1,400bn. And that’s just Italy! Worse, the replacement body, the European Stability Mechanism, is a undemocratic quango with dictatorial powers. Its board are to be immune from all laws and free from taxation. Politically it is a mess. And the sums involved are just too small.
16. Government spending is too high
Public spending has soared in the past decade, from 37.4 per cent in 1999 to 48.4 per cent in 2011. In Northern Ireland and Wales, public expenditure has risen to around 70 per cent of GDP, and it is 64 per cent in the North East. Compare that with Hong Kong, where the government is a paltry 17 per cent of the economy and growth is a handsome seven per cent a year.
17. Fusion reactors won’t save us
Talk about the energy crisis and some smart-arse will mention nuclear fusion. “Free, limitless power will save us.” It won’t. Sorry, but fusion is still decades away. The problem is finding materials which can survive the 30 million degrees Kelvin temperatures as well as neutron damage. The ITER plant in France won’t begin testing until 2026. The most realistic timeline for fusion is 2050, assuming the technical problems can be overcome.
18. More Brussels laws for the City
Our referendum-phobic prime minister admitted recently: “London is the centre of financial services in Europe. It’s under constant attack through Brussels directives.” He’s not wrong. There’s the AIFM, the growing powers of the European Securities and Markets Authority and a conveyor belt of harmonisation directives to look forward to. Can Dave protect the City? Your call.
19. Britain’s high streets are becoming ghost towns
The BBC’s Queen of Shops Mary Portas declared Britain’s high streets “doomed”. Not many dissented. The number of empty shops has trebled since 2007, and in many towns, such as Hartlepool, Newport and Blackpool, one in four shops is empty. Why? Poor car access, crumbling public transport links, bland chain branches and the superiority of out-of-town malls.
20. Patent wars
The tech majors are positioning for all out patent war. Google spent $12.5bn on Motorola Mobility to stock up on patents as Apple threatens to take Google’s mobile operating system Android to court. Apple has already won a preliminary injunction stopping sales of the Samsung Galaxy Tab in Australia. German and Dutch courts have issued similar injunctions. It’s knuckleduster time.
21. Vickers ICB is yet to be implemented
Bank reform hasn’t gone away. Sir John Vickers’ report on banking will need to be debated and then implemented. In the long run the reforms ought to strengthen the UK financial system, but in the short term the impact will be significant. And as critics point out, many banks will still be too big to fail.
22. Immigration restrictions
The Migration Advisory Committee is recommending only workers salaried at least £49,000 should be given leave to stay in the UK. Sourcing Indian IT workers and Chinese manufacturing experts is going to be a whole lot harder.
23. Olympic Games
Shocking news from the tour operators has raised serious questions about the economic merit of hosting the Games. The European Tour Operators Association surveyed 28 of its members and found bookings were down by an average of 90 per cent during the Olympic period in 2012. It forecast £3.5bn could be lost to the UK economy.
That’s before we factor in travel chaos and the distraction the Olympic fortnight will bring. Don’t forget that Team GB is in the football too this time, maximising the sick-day potential. Kate & Wills’ wedding hurt Q2 2010 growth, said the ONS. That was just a weekend. What will the World’s Greatest Show do? The real economic impact is up for debate, but it’s worth thinking seriously about.
24. The impact of the Greek default hasn’t been felt yet
About that Greek default. Well, it hasn’t actually happened yet. Furthermore, the proposed haircut only affects private sector holders of Greek debt. The next stage is for other Greek institutions to negotiate their position with the Greek treasury. Plus, we haven’t seen how the default will undermine banks across the Eurozone. In short: the saga of Europe’s basket case economy still hasn’t played out. The worst is yet to come.
25. Bitter rows in Europe
It’s not just the Greek default or Italy’s deficit. The whole European project is falling to bits. Goodwill is evaporating. Things are so dysfunctional Chancellor Merkel is demanding new treaties to reform the EU. And what are her chances of forcing through new treaties, when such a move would trigger referendums in the UK and Ireland and possibly half a dozen other nations? Markets hate political uncertainty, but that’s all they’ll get from Brussels for the foreseeable future.
26. Russia’s still a riddle, wrapped in a mystery, inside an enigma
Russia is corrupt to the core. Judges are bribed. Laws are flouted. More than 300 journalists have been killed since including the editor of Forbes Russia, Paul Klebnikov. Even President Medvedev earlier this year lamented the lack of the rule of law: “Honest entrepreneurs must be confident in property rights, in the rights to what they have purchased in any deals.”
To investors who have had assets and whole enterprises stolen those words will sound hollow. Perhaps the best we can hope is that the Russians keep the oil and gas flowing, and resist cutting us off like in 2009.
27. Black Swans are out there
Disasters have a horrible knack of coming out of nowhere. For example, Dr Roger Musson of the British Geological Survey says London is overdue a 5.5 magnitude earthquake. Typical Roger. Always talking down the economy…