Tuesday, 24 August 2010

How to Read the Uk Economy....

In my Money Week column this week, I've been discussing how we need to look at a different set of indicators to get a feel for how the UK economy is doing. Here's a taster....

Is Britain about to face a double-dip recession? The media and the economic forecasters in the City have been in a flap about that much of the past month. House prices have stalled, and may be falling again. Consumer spending is sluggish. There are big cuts in government spending coming down the track. It isn’t hard to make the case that the reasonably robust bounce back from the collapse of 2009 we are witnessing right now might be about to go into reverse, and that another recession is just around the corner.
Then again, perhaps we are looking in all the wrong places for signs of life from the British economy. Over the last twenty-five years we became used to watching house prices and the retail sales figures to get a sense of where the economy was going. That worked perfectly well during a property, debt-fuelled bubble. But that economy has vanished forever. The British economy of the coming decade will have to be based on exports, small businesses, and making things. And to get an idea of how that is going we will need to get used to a very different set of indicators – the trade balance, the savings ratio, company formations, and private sector job creation. Those are the numbers that will tell us whether the economy is showing signs of life or not.
For most of the past couple of decades, you could get a pretty good idea of where the economy was going just by looking at the monthly mortgage approvals figures. If people were borrowing more money, pretty soon they’d be buying a new house, and a few weeks later house prices would go up. All the people who’d bought new houses would soon be loading up their credit card with all the stuff they needed to put into it. And everyone else would see how much their house had gone up in value in the past year, book themselves a winter holiday to celebrate, then head down to the shopping mall to buy some new clothes for the trip.
The sequence was pretty simple. In an economy based on property and ever rising levels of debt, if you just kept an eye on house prices, and the sales figures from a couple of the big high street chains, you’d have a very accurate idea of how the economy was doing.
But along with the rest of the developed world, the UK has reached the end of that road. The easy-money days are behind us. The credit has all dried up. The British economy might do well or badly in the next decade, but the one thing it won’t do is go through another house price, retail spending led consumer boom. If it is to have any chance of prospering, it needs to create real wealth in the private sector instead.
So what indicators should we be looking at instead?
The trade balance is good place to start. It used to be headline news every month, but has been largely forgotten about in the last twenty years. But with a big depreciation of the pound, the British should be making things and selling them around the world. They should be importing a lot less as well, as they tighten their belts and concentrate on repairing their balance sheets rather than getting a bigger flat-screen TV to put on the wall. Both should result in an improving trade balance.
The savings ratio might be another good indicator. The UK needs to save more and spend less, and much of that saving needs to be directed towards re-building the economy so that it is less reliant on financial services and government spending.
So too is the rate of company formation, and the rate of bankruptcies. Again, the numbers of new small companies getting started, and the percentage of them that fail or flourish, will be a clear measure of whether a fresh wave of entrepreneurs are establishing new industries. The rate of private sector job creation will be important as well. For most of the last decade nearly all the new jobs were in the public sector. In the next ten years, it will be private companies, and mostly small ones, that have to create the jobs.
As it happens, most of those figures are looking pretty good right now. The trade gap is indeed starting to narrow. Last month, exports rose by more than 4%, and imports by only 1%, producing an unexpected narrowing of the deficit. Exports to non-EU countries were the highest on record. Our car exports were up 11% month on month. That’s pretty encouraging.
Manufacturing is currently up 4.1% year on year, with the biggest increases in the machinery and equipment industries. Company formation figures are not regularly produced (and many new companies are just tax reduction vehicles). But company winding up orders in the court s are down 17% year-on-year, according to the latest figures from the Office for National Statistics. That’s a good sign as well.
Unemployment is down slightly, and more jobs are being created. Most importantly they are in the private sector. The numbers of people employed in the public sector fell by 7,000 in the first quarter of this year, whilst private sector employment rose by 18,000. It is a small step, admittedly, particularly when you remember that 29 million people have jobs in the UK. But a small step is still valuable when it is in the right direction. Britain needs a lot more private sector job creation in the years ahead.
The important point is not whether those numbers are looking good or bad. Sometimes they will be up, and at other times down. They are, however, the numbers that count.
None of the pundits writing about house prices or retail sales or government spending are adding anything to the debate. They are referring to an economy that’s vanished. There are a whole different range of indicators we need to pay attention to now.

Wednesday, 18 August 2010

The City's Fresh Challengers....

In my Money Week column this week, I've been lookig at the fresh challenges the cuty faces from financia;l centres in the emerging markets. Here's a taster....

Three years on from the start of the credit crunch, plenty has been written about how not much has changed. The banks are all paying big bonuses again. Trading levels are close to where they were before the crisis began, and equity markets have recovered the bulk of the losses they suffered when the markets crashed. At this rate, even Sir Fred Goodwin will be able to show his face in public again soon.
But one thing has changed, and decisively so.
In the wake of the credit crunch, all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by rising group of new capital markets in places such as Seoul, Mumbai, Shenzhen and Dubai.
That trend is not going to reverse anytime soon. In response, the City has to work out how to remain competitive in the decade ahead. It should focus on three tasks. Concentrate on its Northern European heartland. Encourage more inward investment. And focus on selling expertise and advice more than financial products themselves.
There is little mistaking the way the hierarchy of financial centres has been shaken up in the wake of the credit crunch. We were used to a financial universe in which New York, London and Tokyo were the dominant forces (and pretty much in that order). Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action, rather like John Cleese playing Q in a James Bond movie.
Now, however, there are signs that is starting to change. The traditional centres are gradually losing their share of the market. For example, the US and the European Union between them accounted for 75% of global stock market capitalisation in 2001, but are down to 50% this year. The number of listed companies from the BRIC nations (Brazil, Russia, India and China) was just 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s IPOs were in China alone. Likewise, Asia’s share of the total investment banking revenue pool rose from 13% in 2000 to more than 20% in 2009.
Not surprisingly, new financial centres are emerging to capitalise on that boom. In the annual ranking of the competitiveness of financial centres published by the City of London, London and New York have remained at the top for years. But look at the smaller cities racing up the table. Cities such as Beijing, Seoul, Shenzhen, Shanghai, and Dubai have improved their global ranking hugely since 2007: Beijing is up 20 places, Seoul up 17, Shenzhen up 14, Shanghai up 13, and Dubai up seven spots. Seoul has increased its competitiveness by 42% in just two years. They are clearly the rising powers of global finance.
“In the long-run, emerging financial centres, especially in Asia, are likely to succeed in establishing the scale and scope in their market environment that will help them advance into the top group of global locations,” concluded a recent report on the subject from Deutsche Bank. It predicts a ‘multi-polar’ financial market, with many different centres sharing the available revenues. The big three will remain strong, but they will never be able to recapture their traditional dominance.
It is no great surprise that Seoul and Shenzhen are ring fast up the rankings. That is where the growth is. Other centres may join them. The Russian President Dmitry Medvedev spoke recently of turning Moscow into a major financial hub, and the rouble into one of the world’s reserves currencies. For a country that was defaulting on its debts only slightly over a decade ago, it might not sound very likely. But with Russia’s rapid growth, it would be foolish to bet against it.
So how should the City respond?
There are three ways it can remain competitive.
First, it needs to focus on its Northern European hinterland. All financial centres have strong ties to their local markets. The City has spent too much time focussing on being a global hub. But having decisively bested Frankfurt and Paris to become the main European financial centre, and with the euro not looking like much of a threat to anyone anymore (except possibly to itself), it should be serving the French, German, Dutch and Scandinavian markets. It should be the place entrepreneurs from Eindhoven, Hanover or Lyon come to raise funds, and stage their IPOs. The City needs to widen its definition of its backyard – then make sure it dominates it.
Next, encourage more inward investment. It has done brilliantly as a base for the giant American and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But those banks are not the rising forces. What the City needs is to attract a new wave of incomers. It should be the place that Indian, South Korean, Chinese, Brazilian and Russian banks and brokers set up their European offices. It needs to figure out what they need, and how to offer it to them. Ideally, London should be the place a Shenzhen bank plugs itself into the global money markets quickly and cheaply.
Thirdly, get into the picks and shovels business. In a gold rush, it’s the guys selling the digging equipment who make the most money. The new financial centres still have weak infrastructure. They need IT systems, back offices, and the expertise to run banks and bond markets. London should concentrate on selling it to them. Just as the German economy benefits from the rise of the BRIC economies by selling them the machine tools they need to build all those factories, so London should be selling them the machine tools they need to get into the financial services industry.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency – because it isn’t going to be easy.

Friday, 6 August 2010

Lethal Force - A Short Story

The Red Bull magazine has published a short story that features Steve from the 'Death Force' series. You can read it here.