Figures suggest that the UK has avoided the threat of a triple dip recession as GDP rises 0.3% in the first quarter. But will this boost consumer and business confidence? Is this a sure sign that the economy is healing?
The first three months of 2013 show that gross domestic product (GDP) has grown by 0.3% according to preliminary findings by the Office for National Statistics.
The Chancellor George Osborne said the figures were an “encouraging sign that the economy is healing”.
According to Economists, the figures should give a slight rise to consumer and business confidence, but the wider economic picture is still uncertain.
As usual thousands of us are maxing out their credit cards buying Christmas gifts. Needless to say the banks are doing their best to help. Of course they do have a small problem of PPI mis selling claims costing them billions of pounds and massive fines for manipulating LIBOR! So to help them meet these extra bills they are tweaking the credit card interest rates for credit card purchases from 18.3% in December 2011 to 19.1% in December 2012. Well, who do you think was going to pay for these misdemeanours?
The Bank of England may have left rates at an all time low but not our ‘friendly’ high street bank. Just for good measure authorised overdraft rates are up from 15.3% in December 2011 to 15.9% in December 2012.
This sort of thing always reminds me of the story of a pie and pasty manufacturer. He had just taken delivery of his new Rolls Royce and was showing it to a friend. His friend remarked that business must be good? Back came the response, ‘a half penny on all the pies and pasties paid for this!’
What of our other entrepreneurs? Wonga are looking at internet purchases, they want you to borrow the funds from them to finance your purchase. They will charge you 7% up front added on to your loan and you pay it back over three equal monthly instalments.
Next June our new Governor of the Bank of England is installed. Hopefully instead of worrying about the rate of inflation he will be charged with stimulating a growth economy!
Some more sad finance news this week as Cheval Bridging Finance Ltd, which also includes Cheval Commercial Finance Ltd is going to close its doors. The FSA regulated lender has been trading since 1995 and managed to survive the credit crunch. It is believed that having been unable to secure renewed funding from its main funder, Clydesdale Bank, Cheval has been left with no other option than to close down. It is believed that Clydesdale’s decision is not a negative reflection on Cheval, but purely due to policy changes made at the National Australia Bank that owns Clydesdale Bank. As a result Cheval is unable to take new enquiries and has already made a number of redundancies but are looking to try and secure alternative funding.
Back in September this year Tiuta, another bridging lender, was also placed into administration. 2012 has seen a number of bridging loan providers disappear, but it has also seen many new lenders enter a growing market.
These new rules include placing greater emphasis on checking that the borrower can afford to repay the mortgage, and this will be upper most in the new rules! Interest only mortgages will still be allowed but the borrower must demonstrate that they have a way of settling this mortgage at the end of the term. Simply relying on house prices increasing, then selling and downsizing will not be acceptable.
Some people might argue that there was not much wrong with the old system. However repossessions could well have been significantly greater if interest rates had not been so low and lenders had not shown any willingness to help people who were struggling to meet their commitments. In reality however, most mortgage lenders are all ready adopting the new approach to lending so we are unlikely to see much more dramatic change.
Of concern is the very large number of people who are currently on interest only mortgages and who do not have the funds to pay off their debt. In addition if they want to move or downsize because of their age they may not qualify for a new mortgage. Many of these people may have no other option than to consider the rental sector.
I believe that there is a threat of more expensive houses coming on the market for which there are no buyers. Potential buyers who previously self certified their income will not qualify and others who want interest only will not fit the lenders criteria. As a result it is highly likely that there could be further drop in house prices for properties in the higher price sector. Indeed lower and medium priced property values are being helped due to the demand for them by property investors where high rental incomes can be earned. Larger value properties do not achieve the return on investment that smaller value properties seem to achieve. Therefore investors rather buy several smaller properties with their money and of course buy to let mortgages, than a single larger property.
This time things seem tougher. Public sector borrowing has come down.
- 2009-10 – £159billion
- 2010-11 – £142billion
- 2011-12 – £119 billion projected
Future reductions are going to be hard especially as the cost of benefits has grown and corporation tax payable by companies has decreased.
Recent studies have found that 44% of business leaders had postponed at least one of their investment, expansion or employment decisions in 2012 because due to economic or business uncertainties. Furthermore, of those polled, more than half have delayed these decisions until at least 2013.
Apart from the obvious Eurozone problems, where 50% of our exports go, there are constraints on access to finance, some confusion over Government policies and rising pension deficits.
Rising pension deficits are a major worry. Pension funds have always invested heavily in Government bonds, but the return on these and other non speculative investments are just not meeting the income requirements and projections of the pension fund operators. When this happens the fund needs to call on subscribers to increase their contribution.
As a result companies are having to divert funds, that could have been used for expansion, into their pension schemes.
Recovery is going to be consumer led, so Labour’s conference call to remove stamp duty payable on properties for first time buyers would help. There is a demand for starter homes and the government should focus on how they can get this sector moving. There is already some help towards mortgages, some help on deposits and stamp duty holiday will help as this has to be paid from deposit money, not part of the mortgage.
The rental sector is still buoyant and there are many buy to let mortgage products available to help the would be property investor. If we could increase housing supply then possibly the government could look at ways of encouraging the rental sector, by making funds available through short term bridging finance to get developments moving quickly.
Historically building of the country’s infrastructure, roads, railways and homes has always helped to lead the country out of recession and get people back into work. Unfortunately many of these projects take time to get started so anything that can kick start a development project would be a bonus.
New Occupational Pension scheme, automatic enrolment.
Starting October 1st all large employers will automatically enrol all staff into a work place pension scheme. This applies to all staff earning more than £8105 and aged between 22 and 65.
Smaller firms will have to start their schemes in the spring of 2013.
Initially employers will contribute 1% of the employee’s salary and the employee will pay in 1%.
In 2017 this will rise so employer contributes 2% and employee 3%.
In 2018 increases again so employer contributes 3% and employee5%, a total of 8% of salary.
Now is the time to fix your energy bills
With winter approaching an Energy companies proposing higher than inflation rate increases, consumers should look closely at their existing arrangements. The advice is not to look for a small short term saving but look for a fixed price scheme that will take you through the next two winters to spring 2013.
Look at the cheapest way to pay, usually monthly direct debit.
Britain’s biggest manufacturer
Did you know that Tata, the Indian conglomerate, is Britain’s largest manufacturer.
Amongst the businesses they own are Jaguar, Land Rover, Tata Steel Europe, formerly Chorus, Brunner Mond, a chemicals company and Tetley tea.
Watch out Domino’s Pizza
Domino’s pizza delivery market is facing a challenge from Papa John’s who are soon to open their 200th store and plan to open 150 new branches over the next 3 years.
Last month the Government announced a package of reforms to help revive the construction industry. At present homeowners are allowed to extend their home by up to 13 feet without planning consent. The government have signalled their intention to allow this right to be increased to 26 feet, but only up to the end of 2015.
However, those living in conservation areas or areas of outstanding natural beauty will still require planning permission.
Pensions could back mortgages
Liberals are suggesting that parents should be able to offer to guarantee a deposit for their children to buy their first home by using their pension lump sum payment as security for their children’s mortgage. However, insurance companies are quick to warn that there are risks and pensions were not planned for this type of venture.
The Government is to put £1bn into a bank designed to increase lending to business.
The Governor of the Bank of England Mervyn King says economic growth is on its way. There are a few signs of recovery, but a lot depends on resolving the Eurozone crisis.
John Major, former UK Prime Minister, says economic recovery may be on its way, falling unemployment and rising stock market indicates Britain was on the slow road to recovery
Get out of Wales now!
We have just heard that one Welsh lady has rented a flat across the border in England so she can receive a cancer treating drug that is not available on the National Health in Wales.
Wales is heading to be the poor relation of England. The Welsh voted for devolution although only a minority of all those entitled to vote actually voted, but what they did was voted for permanent socialist government and divorced themselves for the wealth of London and the South East which is the source of the money.
Policies such as abolishing prescription charges are all very well if you can afford it. If you have to pay for your prescription you will think twice do you really need it? As a result the medicine bill has risen so there is less money available for other medical services.
The past week has seen the Government announce further plans that are aimed at providing a further boost for the construction industry. Their hope is that by introducing measures that will help stimulate and boost building projects, this will create 140,000 more construction jobs, leading to more money becoming available and more money for businesses. At the same time they are hoping to see the property development of 70,000 new homes which will also include a good proportion of affordable housing. The Government are planning to invest about £10 billion for new homes and £40 billion into large construction projects to improve the country’s infrastructure.
These plans are aimed at supporting property developers and businesses through help with funding but also by introducing new measures to make gaining the necessary planning permissions quicker and easier. Many property development projects that have been held up or abandoned due to planning restrictions may now be able to hit the start button. In addition the Government want to make changes to the size of extensions that can be added to existing homes without having to obtain planning permission. These changes basically involve doubling the size of an extension that can be added onto a property without the requirement for planning permission. These changes will probably be only for a limited time, but will greatly help homeowners and businesses who want to improve their properties.
What the Government is trying to achieve is to create a stronger economy whilst at the same time making it easier to build new homes, easier to obtain the finance to buy a new home and also make it much simpler and more appealing to extend your existing home. The measures to help achieve this include removing some of the restrictions that have caused the development of over 70,000 homes to stall. Property developers have abandoned projects that have become too costly due to the affordable housing requirements placed upon them. If a property developer can prove that the affordable housing requirements are responsible for making a housing construction project unviable, they may be able to get these requirements removed, making the project a viable one.
In addition the Government wants to build a further 15,000 affordable homes and also bring back into use a further 5,000 properties. They also want to create 5,000 more homes that would be made available for rental.
To help first time buyers the Government wants to extend the FirstBuy scheme by providing a further £280 million. This money will be used to help 16,500 first time buyers by providing them help with finding the deposit needed in order to purchase their first home.
A very important step is that the Government wants to provide guarantees of up to £40 billion for construction projects to improve infrastructure and a further £10 billion for the development of new homes. Improving infrastructure is crucial for a successful economy and this can be seen in countries such as China who have in recent years concentrated large sums of money to vastly improve its infrastructure whilst at the same time creating jobs and wealth. In addition Germany has also invested larger sums into its infrastructure when compared to other countries, being able to do so for a number of reasons the main one being they do not have such a large military budget.
Whilst the financial crisis in the Eurozone continues the UK does not want to sit around and avoid taking measures to protect itself. Consequently in order to help protect the UK from the Eurozone financial crisis, the UK Treasury and the Bank of England have announced a £140 billion plan that is hoped will both protect and also jump start the British economy.
There are many proposals but the main plan is to provide billions of pounds in cheap loans to the banks, who in return for this money will provide more needed loans to businesses and more mortgages to households. This is hoped will help investment in business and increased production, together with helping people to buy homes and providing a boost to the property market. Overall it is hoped that this measure will help support the flow of credit to where it is really needed.
The money being made available will be through a ‘funding for lending’ scheme. This scheme will provide cheaper than normal loans to the banks for a length of time that could be several years. The amount of money an individual bank will receive, and at what cost, will be determined by the lending performance of that bank. The lending performance of each bank receiving money from the funding for lending scheme will be determined by the bank’s ability to maintain or expand their lending levels to households and UK businesses that are outside the financial sector.
An additional proposal from the Treasury and Bank of England is to provide a short-term liquidity scheme that banks can use to cover their cash shortfalls. This liquidity scheme will provide a cheaper and simpler way for the banks to cover their cash shortfalls than the facilities they currently have to use.
The Bank of England says that these measures are being put in place to help protect the UK during these financial stormy times until calmer times return!
These measures are very welcomed especially as there have been recent rises in the costs for commercial mortgages, loans and other financial facilities due to the banks struggling to raise money due to the ongoing Eurozone problems. The measures should also help to protect the UK banks from the impact of the Eurozone financial crisis because they will not be so reliant on the international markets in order to raise money.
In November 2011 the UK Consumer Price Index had inflation at 4.8%, but this fell during December 2011 to 4.2%. Similarly the Retail Prices Index, which is the UK’s inflation figures which also takes into account mortgage payments, also fell, from 5.2% in November 2011 to 4.8% in December 2011. These falls are the highest for over 2 years and signify some hope that inflation could drop to 2% by the end of 2012.
Over the channel France has had its triple A credit rating reduced a notch by Standard and Poors. Austria has also had their triple A credit rating reduced, following major economic powers like Japan and the USA who had their triple A credit ratings reduced last year.
Standard and Poors have sent a shot across the bow of European countries, illustrating that the financial markets do not believe that they are doing enough to balance their finances and they need to start acting now to sort the European financial problems out.
The European Union needs to quickly come up with a plan that will deal with the problems in Greece and also the Italian debt crisis. Most countries in Europe need to make significant cuts in expenditure and need to have in place positive plans to balance budgets. They also all need to improve economic growth and become more competitive.
The UK has retained its triple A credit rating, despite also having large debts. However the ratings agencies have more confidence in the UK because they have plans in place and are taking positive steps to address and deal with its financial problems.
Other countries in Europe suffering will also have negative consequences for the UK, so it is important for all our neighbours to make positive plans so that we can all make a good financial recovery. As the financial economies improve so will our lending institutions’ ability to lend. However, to help growth investment is required so the speed of any growth maybe very much dependant on the lending institutions and how willing there are to lend. Therefore the availability of commercial mortgages and bridging loans may very much determine the speed of our financial recovery.