Bad News for the UK from the OECD

The OECD have today warned that the UK economy will contract marginally in Q4 of this year (by some 0.1%) and will further fall in Q1 2012 (by 0.6%) and so enter a second period of recession.  See OECD predicts recession for more details.

Clearly the Ezone crisis will have a decisive role in the OECD downgrade, but it is also clear that the Chancellor has been following a high risk policy approach at a time when high risks are to be avoided.  His main risk is of front loading spending cuts during the Parliament as the central plank of his fiscal consolidation plan.   At a time when the private sector has been finding it hard to regain its growth momentum, the huge cuts in public spending are expecting businesses to find even more ways to expand to make up for the cuts.  Not only do they need to find sales to make up for what they lost in the recession, they have to make good the loss of spending power in the economy driven by spending cuts.

Should this come as a shock that has been brought on by feckless management of the EZone crisis?  Well, not really.

India in transition

I have just returned from a short business trip to Mumbai, India.  The client is a domestic bank with a short history but impressive plans to grow within the Indian retail market.  I must say the relationship has taught be much about what in the West is often described as an emerging market – frequently with little knowledge beyond hearsay behind the realities of the situation of the economic prospects for the country.

I return from this assignment with one major impression of the warmth and energy of the senior management team.  They were open to new ideas and generous in their hospitality.  They are proud in the achievements of their country: proud too of the contribution they can make to its continued growth, development and increasing prosperity.  It is a welcome evidence of pride not just – as they said – in ‘the money’ but in the economic welfare of the economy.  Something that does not seem to pervade the wider global banking industry at present.

A second issue that surprised me was

Bond Market Mayhem - what happens now?

When reflecting on current conditions in the bond markets it is worth remembering two aspects of their behavior.   The first is that traders operate ruthlessly and quickly to changes in sentiment and expectations.  And secondly, these changes may appear to be based on objective assessments of ‘the numbers’ but they embody many subjective views of the prospects for returns on debt.  There is currently quite a divide between the negative mood in bond markets and increasingly positive news in the ‘real’ economy.

 The consequence of the ruthlessness and speed of action of traders is that the markets have become an

Expect the Yuan to rise ….

­­­­­­­­but not for yet a while.

There have two major developments in the last 7 days in relation to the competitiveness of the yuan – or renminbi – the currency of China.  The first was the decision by US Treasury Secretary Tim Geithner to reserve judgement on whether the Chinese are manipulating their currency and keeping it low to maintain its export competitiveness.  The second was the meeting over last  weekend of the Chinese government to discuss its plans for the next 5 years of growth and development.  Unlike western economies the Chinese continue to create 5 year plans to guide the economy.  The one now published – the 12^th - covers the years 2011 to 2016.

Funding Universities in England and Wales

Government policy in the UK has moved decisively towards a more consumerist model for funding higher education.  Traditionally we have taken the view that the wide economic benefits of having a workforce educated beyond age 18 will more than pay for the investment required to get them there.  That is to say that the economic benefit of investing in education will be seen in higher levels of economic activity and growth and therefore more tax income for the government.  On that basis the ‘taxpayer’ is more than able to bear the cost of University and still be ‘quids in’.

The balance of the argument has now moved on.  First we introduced top up fees a decade ago.  This means that currently students pay up to £3290 per year for their courses which they receive as a student loan repayable after graduation.   It is essentially requiring students to pay for a part of their education out of the enhanced lifetime income stream it gives them.  Seems reasonable.  We are now facing the prospect of increasing the top up fees to some £7000 and perhaps more.  We must wait and see the full debate as it passes through the Parliamentary process.

More fundamentally

Growth is on the up as interest rates stay low

This is the time of year when the key global institutions (the OECD, IMF and World Bank) review their forecasts for the year in view of how economic events have developed since they last published reports in the Spring.

The Paris based OECD has been especially busy this month with updates on their Spring assessment for global growth as well as some newly published views on the state of several major economies including the US.  No time to lose after ‘la rentree’.  Both reports make pretty good reading at a time when many headlines are still discussing the likelihood of a double dip in growth. 

Their autumn global update (to be found at: www.oecd.org ) admits to a slower level growth for the second half of the year but with longer term improvements on the cards and a reducing risk of a return to a downturn. 

To Basle or not to Basle....

The agreement reached at the weekend to implement new capital requirements for banks is the next step on the road towards reforming our international financial system.

The key components of the agreement are that:
a) banks will be required to hold capital reserves of up to 7% of their loans as a buffer against bad and under-performing assets.  This is an increase on the 2.5% that has been the norm in the past.  And was the woefully insufficient amount that was the norm in the recent crisis.
b) the new arrangements will be implemented from 1 January 2013 giving banks and regulators plenty of warning and time to make the changes.  Already a number of banks have announced their plans to raise capital to this end.

If fully ratified by the G20 at their meeting in November,