Monthly Archives: January 2013

Britain is facing a ground hog year

As the Sterling is edging away from its 9 month low against the euro, it  is still very vulnerable to renewed selling on concerns about its fragile domestic economy.

Yesterday, financial experts warned that Britain is “likely” to lose its AAA credit rating as it seems that there’s another threat of a triple dip recession. The world’s three biggest rating agencies have all put the United Kingdom on a “negative outlook”. For instance, the chief economist at IHS Global Insight predicted that at least one of the three main rating agencies may downgrade Britain this year. Of course,  a lower ranking indicates that the country is a risky alternative for prospective investment. Arguably, such recent economic developments can even push up the borrowing costs for businesses.

Merely last week, the National Institute of Economic and Social Research (NIESR) calculated that the British economy shrank by 0.3% in the final quarter of 2012. The Centre of Economics and Business Research (CEBR) is forecasting that in 2017/18,  the net borrowing will be around £68billion. This amount is more than double the previous £31billion benchmark. CEBR is describing the UK’s deficit as a “three-parliament” problem, as they believe that austerity could possibly stretch beyond the year 2020.

In a similar vein, the annual CPI inflation stood at 2.7 percent in December. This means that it is currently somewhere well above the Bank of England’s 2.0 percent target. A high inflation could worsen an already weak economy by reducing British consumers’ spending power. CEBR is envisaging that the UK economy will grow by a mediocre 0.5% in 2013 and by 1.2% in 2014. Moreover, the unnerving sterling investors are wary of a probable referendum on Britain’s future membership prospects in the European Union.

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Britain at a crossroads

Prime minister David Cameron is under pressure from his own party’s euro skeptics to hold a national referendum on the country’s membership of the European Union. Many believe that the U.K. economy is being hampered by unnecessary rules which are imposed by Brussels. Evidently, some conservative MPs are demanding to loosen the existing ties with the EU bloc to a relationship based on trade partnership. At the same time, Cameron is also resisting a push by many member states like France and Germany to grant central authorities in Brussels, in particular greater powers over financial and legal affairs.

Mr. Cameron seems to believe that the U.K.’s best interests are better served by staying in the EU, so that his country can have access to the European single market, and also have a say in how it is governed. For the record, the British prime minister is due to make a speech in mid-January to outline his position about this politically divisive matter. Last Wednesday, he pledged to his party that he will get the changes which suit Britain. Unfortunately, this issue may have also fueled talk that the U.K. could eventually withdraw from the EU.

In this light, ten high-profile business leaders warned their PM not to seek a wholesale renegotiation of the U.K.’s membership of the European Union. In a letter published last Wednesday in the Financial Times, they argued that Britain’s membership of the EU is being put at risk, and that such a move is creating damaging uncertainty for British business. In their letter, the outspoken executives admitted that Mr. Cameron was right to dismiss the idea of emulating Norway or Switzerland, which are enjoying a trading relationship with the EU. Alas, they have no say in the rules of the European single market. The businessmen maintained there was an urgent need for EU reform in areas such as employment legislation and EU budgets. They went on to suggest that that such a plan could fail, pushing the U.K. out of the EU and hurting business in the process.

Of course, membership in the EU has given the U.K. access to the massive European market and a say in how the region should govern itself and run its financial markets. Britain has also benefited from EU funds to build its infrastructure such as broadband networks to keep up with its neighbours.  Arguably, the recent turbulent economic times have inevitably forced the 17 Eurozone countries to move ever closer together, creating a more powerful union that could leave non-euro members like Britain with less negotiating power.

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Environment and economy on collision course

According to the latest communication from the the World Economic Forum; weak economies coupled with  extreme weather conditions in some places, have brought greater risks and instability in the international markets. In a highly uncertain economic backdrop, the European Union has avoided a euro break-up in 2012. Whereas, the United States stood very close to fall off from its fiscal cliff, merely a week ago. Of course, business leaders and academics are raising their alarm bells as they fear that many politicians and policy makers are not capable of addressing their fundamental problems.

These arguments were mirrored in  the recent ‘Global Risks 2013’ report, which surveyed more than 1,000 chief executives and owner-managers. This report maintained that the industry bosses are more pessimistic about their economic outlook, than how they perceived it a year ago. Unfortunately, many multi-national firms are facing unprecedented wealth gaps and unsustainable government finances in some of the countries, where they carry out their business. In addition, during this year some areas witnessed a marked increase in severe weather conditions, which may have also affected their operations as well as their bottom-line.

This particular report featured an 80-page analysis of risks which are envisaged for the next 10 years. It anticipates the World Economic Forum’s (WEF) annual meeting, scheduled between January 23rd to 27th. It will be held in the Swiss ski resort of Davos. This meeting will once again symbolise the modern globalised world, where business leaders hailing from successful multinational corporations mingle with  politicians and bankers. On the horizon, the economic front indicates that there are some dark clouds which are causing some euro-zone uncertainty. The report suggested that, “the associated risks of  systemic financial failure are limited, yet they cannot be completely discarded”. It transpires that there are rising concerns in the environmental issues, particularly about the greenhouse gas emissions. Apart from the strict European standards, the failure to adapt to climate change is being perceived as the biggest challenge for sustainability.

For instance, superstorm Sandy created havoc and unnecessary costs on the US east coast, in October. This year, the temperatures in China chilled to a 28-year low. Today, south eastern Australia battled scores of wildfires in heat-wave conditions. It goes without saying that slack resources will have to be dedicated to mitigate the rising risk from severe and unforeseen weather conditions. As a consequence, our well-being and the global prosperity of our future generations may be threatened.

Interestingly, on this occasion the theme in Davos has been dubbed, “resilient dynamism”. Inevitably, the governments and the businesses will have to come up with reasonable strategies and approaches to ensure that critical systems continue to respond to such contingencies. Essentially, the regulatory authorities and the business practitioners are expected to successfully weather the economic and environmental storms.

(source: http://reports.weforum.org/global-risks-2013/risk-case-1/testing-economic-and-environmental-resilience/)

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The fiscal cliff put political bickering aside

This year may have started on a positive note for many investors. It appears that the American fiscal cliff issue has been resolved satisfactorily. Beyond reasonable doubt, the US’s debt burden was and still is a very urgent crisis which has to be tackled, in a way or another. Both the Democratic and Republican parties have successfully negotiated a deal in order to avoid the turmoil of another recession. Interestingly, this dramatic news indicates that the two political parties are not as far apart in their fiscal and monetary mindsets. For example, both parties have incredibly agreed that the tax rates should rise on the highest earners, as they realised that the majority of workers cannot afford to pay any additional contributions to the US coffers at this point in time. However, the two parties were very reluctant in tackling the debt burden in a serious manner. Whilst the Democrats were genuinely unwilling to pursue any tough welfare reforms, the Republicans were hesitant about lowering the country’s defence budget.

Yet, the parties should be applauded for their concerted efforts, as they have acted wisely for the sake of their country’s solvency. For instance, the Republicans and the Democrats have recognised that the inheritance taxes should not be applicable across the board, to all and sundry. They agreed that the inheritance tax ought to be deducted only to the largest estates. In the main, the Democrats appeared to concur with their political rivals’ positions, particularly on the merits of preserving Bush-era tax cuts. On the other hand, the Republicans had quietly discarded their previous policies, namely the part-privatisation of Medicare state healthcare for the elderly.

In  plain words, the deal which was reached during the early hours of New Year’s Day shows that at least the US political system is not broken as it is the case across other jurisdictions. Yet, many commentors argue that the deal on the fiscal cliff leaves many contentious problems which will inevitably have to be resolved somehow, in the medium to long term.

The Fiscal Cliff

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