17 - 01 - 08

After all the ups and downs of 2007, it is clear that UK PLC is not in as bad shape at the end of the year as might have been expected, just a few months ago ...

There are, of course, some worrying statistics, but these should be seen in the context of several key facts. First, inflation as measured by the Consumer Price Index is still relatively low (although the 2.1% headline figure belies the actual experience of middle class families, where the real rate of inflation is above 7%).

Plenty to cheer about in 2007

Secondly, interest rates have fallen both sides of the Atlantic, with the Federal Reserve and Bank of England each cutting 0.25% off the cost of borrowing. The fact that the vote for a cut here was 9-0 suggests that there is scope for more cuts and some are predicting a further four quarter-point cuts during 2008. Certainly, money markets appear to have started discounting sterling already.

Interestingly the European Central Bank not only voted against a cut, but also experienced strong calls for an increase from some of its constituents. It is to be wondered whether such fundamental differences between rival power blocs within the Eurozone will allow it to survive long term.

Interest rates round the world
UK	5.50%	Down 0.5%
US	4.25%	Down 2.5%
Europe	4.00%	Held
Japan	0.50%	Held

Thirdly, economic growth is still relatively strong, although a more comprehensive slowdown is expected in the UK than other G7 countries, largely due to out-performance of its peers during the past few years. This is not, however, widely expected to turn into a recession.

Fourthly, employment is at its highest level for a long time, although many new jobs have gone to economic immigrants. Crucially, the number of jobs in the public sector appears to be falling at the fastest rate since 1999, which could help reduce the percentage of Gross Domestic Product (GDP) accounted for by the state.

Fifthly, house prices are similarly expected to fall only slightly; any drop can only be good for first time buyers, which ultimately helps the entire market.

A cloud on the horizon

Keep a weather eye on the balance of payments

It is, however, important to note that the current account (what we used to call the balance of payments) is in a more delicate position, having slumped to a £60 billion deficit; far worse than any of the commentators canvassed by the Sunday Times at the end of last year had predicted. In the past we used to rely on investment income (also called invisible earnings, along with banking and insurance) to make up the difference, but this is no longer adequate for the job and with the deficit 5.7% of GDP, it is proportionately higher than that of the US.

Economists are predicting that there must be a fall in the value of the pound and this has already started to happen, with sterling falling against a basket of currencies. The trend can be expected to continue and will have a number of consequences, including exports for UK producers becoming easier and imports becoming more expensive. This could even result in the repatriation of some jobs to the UK in marginal sectors such as manufacturing and call centres, where the lower wages that can currently be paid overseas could become less attractive when combined with a weakening pound and factors such as higher transport costs and a perception of better service from UK based facilities.

Dreaming of a ‘Black’ Christmas?

Shops need a little help at Christmas

Despite predictions that retailers would see sales growth “in the red” this season, reports of a strong post Christmas surge indicate that they will actually see a 2.5% to 3% increase in business. Unfortunately, their expenses are understood to have risen by 4%, squeezing margins. However, the fact that the high street appears to be fighting off the challenge of internet shopping will be good news for everyone who wishes to see our towns retain what is left of their character.

On the other hand, with more UK families spending a fifth or more of their gross income on debt servicing, than was the case in 1991, perhaps a little less spending would be a good thing.

Markets (Data compiled by the Insurance Marketing Department Ltd.)
After a somewhat turbulent year, the FTSE100 was one of the few indices to end the month ahead, growing by 0.38% to end the year 3.8% up. The FTSE250 continued its lacklustre performance to close 0.85% down on the month, showing a fall of 4.65% for the year.

Taking a two-year view, however, the mid-cap index has actually out-performed the large-cap index, although the gap has narrowed during 2007.

Elsewhere, the Dow Jones lost 0.8% while the Nasdaq100 fell by 0.33%, to finish the year 6.43% and 9.81% up, respectively. The Eurostoxx50 gained a modest 0.11% during December to end the year 6.79% up. In the Far East, Japan’s Nikkei 225 lost a further 2.38%, to end the year 11.13% down.

Oil prices rose by 6.37% in December to $93.88 per barrel for Brent Crude 1-month futures, ending 54.26% higher than at the start of 2007. The pound lost ground against the US$ (down 3.41% to $1.99) and the Euro (down 3.16% to €1.36). As reported elsewhere, this is likely to be beneficial to exporters, but not importers or UK holidaymakers abroad.

More good news

People expect more than a gold watch on their retirement

It used to be true that mentioning the word “pension” was a form of autosuggestion that led people to stop reading an article. Fortunately, most people now recognise the importance of long term financial planning and take a healthy interest in what is going on with their pension funds.

Millions of people in the UK will therefore be pleased to learn that the major pension funds are expected to return to surplus by as much as £15 billion at the end of 2007 and possibly £30 billion, by the end of 2008. This time last year, the deficit was estimated at £40 billion.

Unfortunately this result, which was brought about by increased contributions amongst the leading FTSE100 companies and relatively strong investment performance, could result in some funds having too much money in them, with potential consequences on the firms concerned. The government needs to make sure that employers are not penalised for having overfunded pension schemes, where this is the result of sound planning and strong investment returns, for the benefit of employees.

Coastal flooding
Reports that parts of England will be abandoned to the sea during the next century could start to have an effect on businesses and individuals very quickly.

Could this become a familiar sight off the coast?

Most obviously affected will be parts of East Anglia and the South East, where sea levels are rising and the land is sinking, combining to produce an effective rise in sea levels of as much as 8 cm (3 inches) every decade. This may not sound much, but the Environment Agency is already understood to be planning which areas it cannot afford to defend.

While nature is left to “take its course” thousands of homes and businesses could become “blighted” by the advancing water, with it becoming increasingly difficult to sell property or find long-term tenants.

This is certainly not all down to global warming; there are also geological forces at work. However, those living in low lying areas should be aware that not only will it become increasingly difficult to find insurance, but they need to consider the long term impact of coastal erosion on property values.

The spectre of London’s key landmarks under water may be a long way off; but such images are by no means in the realms of science fiction. Unless we are prepared to retreat to the highlands within as little as 50 years, we need to have a coherent strategy for slowing down the rising tides and building property that is resilient to water surges.

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