| home | contact us | links | |
|
NAVIGATION
CONTACT US
Tel: 01473 234500 Fax: 01473 232138
|
|
|
Blog History
— entries appear in reverse chronological order ... 29 July 2010 Interest Rates + Taxes vs. cutbacks INTEREST RATES UNLIKELY TO RISE BEFORE 2014 The fiscal tightening implemented by the new coalition government should not choke off the recovery, but it will slow UK economic growth over the next 2 years, according to the latest Ernst and Young Forecast. The Chancellor’s 5 year plan to cut the deficit while keeping the pace of the economic recovery is very ambitious, but Ernest and Young believe that in the long term it will lead to more sustainable high quality growth from 2013, because it will be led by business investment and exports, rather than public spending. Peter Spencer, Chief Economic advisor to Ernst and Young comments, "the new coalition plans to cut the deficit are certainly ambitious. But the bulk of the additional tightening is set to come in the second half of the parliamentary term, when we believe that the recovery will be firmly entrenched and the economy should be able to deal with the headwinds from the Budget. On the assumption that the government is able to implement the overall reduction of 40 billion pounds set in the Budget, we expect that the UK growth will struggle to reach 1% this year but will gradually speed up in the following years, to the give the UK a high quality recovery based on trade and investment". High energy prices and the increases in VAT will keep inflation above target over the next 18 months, but Ernst and Young believe that it will then move well below 2% as these effects wear off and spare capacity bears down on pricing decisions and wage bargaining. To prevent inflation moving below 1% it will be necessary to keep the bank base rate low at 0.5% for much longer than the markets have anticipated. Ernest and Young’s forecast suggests that the base rate will remain on hold until the end of 2013, although this is dependant on the assumption that the impending spending cuts actually come through. Peter Spencer remarks, "a base rate of 0.5% will begin to look like the new normal". TAX INCREASES VERSUS SPENDING CUTS As suggested by the coalition government, a combination of tax increases and spending cuts is necessary to cut the deficit. Past evidence suggests that fiscal corrections that are focused on spending cuts are more likely to lead to successful debt reduction with limited impact on growth". However, with the deficit being so large, the government had no choice but to raise taxes, the centre piece being the increase in the standard rate of VAT to 20% on the 4 January 2011. Peter Spencer says that the VAT rise will help to plug the fiscal black hole over the following 12 months. But he is cautious that after the medium term forecast for the UK economy is fraught with uncertainty. "The medium term outlook for growth, inflation and interest rates is critically dependant upon the coalition’s ability to cut back spending" he says. EUROPEAN CRISIS One of the bigger areas of concerns for the UK economy is the escalating European crisis which could damage the recovery. Retrenchment in the Euro zone, the UK’s biggest trading partner, could drag the area back into recession, undermining the value of the Euro, eroding demand for UK exports and weakening UK competitiveness. As the prospect for exports is not as good as it has been in previous Ernest and Young forecast it is essential for the UK to take the lead role in the recovery. Yet with the pace of economic growth set to slow over the next 2 years, business spending is still likely to be held back, with company treasurers more likely to pay down debt than loosen the purse strings for investment opportunities. However, the Budget should go some way to encouraging more investment, with a remarkably business friendly tax package, including relief for small businesses, and projections for cuts in mainstream corporation tax. The coming years will invariably be difficult for the UK economy. However, the emphasis is on spending cuts rather than tax increases over the medium term, reduces damage to incentives and increases the chance of success. However, this forecast — not to say the success of the coalition’s fiscal strategy — aims critically upon the positive response from the UK Plc and the financial markets. 9 July 2010 Post-Budget Outlook — not all bad news … The emergency Budget has now taken place and the coalition Government has put steps in place to start to recover some of the deficit that the country finds itself in. It is good to see the Banks paying their share, and from January 2011 the Chancellor will introduce a Bank Levy which will generate £2 billion of increased annual revenue. Perhaps the biggest money spinner, and the one that will hurt us most, is the increase in v.a.t. to 20% from January 2011. The Chancellor says that the v.a.t. rise will generate £13 billion a year by the end of this Parliament, and that years of debt and spending make this unavoidable. The Chancellor guarantees that despite this measure, the Government will keep every-day essentials such as food and children's clothing, as well as other zero rated items like newspapers and printed books, exempt from v.a.t. over the course of this Parliament. Stephen Law, President of R 3, the Insolvency Trade Body says "increases in v.a.t starting in January next year will be a further blow to those struggling businesses that rely on consumer spend, making spending more expensive at a time when consumers are already tightening their belts. Retailers and restaurants, especially, will find themselves between a rock and a hard place as they struggle to work out what will damage their bottom line more; taking on the extra tax burden or suffering the inevitable fall in consumer demand if they pass the tax on. Eric Stoclet, Managing Director of Crown Mortgage Management comments "household finances across the UK will be under increased strain following the Government's decision to increase v.a.t., but the public sector has borne the brunt in today's budget. The six million public sector workers in the UK will feel the pinch following wage freezes - and the anticipated pension levelling. The main spending cuts in the public sector will not be announced until the Autumn however, and this is when likely job losses are expected, and the real pain will kick in. Historically low interest rates have played an important role in helping struggling householders remain in their homes, but the growing financial burden on the household and rising unemployment will lead to increasing numbers of borrowers defaulting on their mortgage. The new Government is focussing on accelerating the reduction in the UK structural deficit, but it must find ways to assist home owners facing financial difficulty. A clear commitment to extend existing support measures, such as the mortgage rescue scheme, could be positive but more is needed. However, on the positive side all families will receive an increase of £1,000 in their tax allowance. Also the basic State Pension will be re-linked to earnings with pensions going up by the highest of the RPI Inflation Index, Earnings Inflation Index or 2.5%. This will ensure that State Pension keeps pace with inflation and may even grow in real terms. So it is not all bad news ! 3 June 2010 Post-Election Changes — HIPS + CGT … The housing market has picked up pace following the distraction of the General Election. Valuation activity in May rose by over a quarter compared to May 2009, according to the latest research by Connells Survey & Valuation. Despite the uncertainty of the new coalition Government and their housing policies, the number of valuations conducted rose by over 10% in May compared to April. Valuation activity also rose by 27% compared to May 2009. This is the highest change since Connells Survey & Valuation began compiling this detailed index five years ago. Ross Drummond the Managing Director of Connells Survey & Valuation comments "the election was a bit of a distraction for buyers. Housing market activity was slightly subdued in April, as many buyers waited for the election. However, we have seen a strong post-election bounce. House prices have continued to rise and consumer confidence continues to grow. Whilst doubts still linger over the measures to be introduced in the next budget, the underlying fundamentals are in place for the recovery to stay on track". The April data from the Land Registry’s House Price Index shows an annual increase of 8.5%. The average house price in England and Wales is now £165,596. This is the sixth month in a row in which the figure has been positive. The monthly change from March to April is a rise of 0.2%. All regions in England and Wales experienced increases in their average property values over the last 12 months. The region with the highest annual price change is London with an increase of 14.8%. The region with the smallest annual rise is Yorkshire and the Humber with a movement of 0.7%. Government Capital Gains Tax proposals could force a quarter of property investors from the housing market, according to a survey by LSL Property Services plc. Nine out of ten landlords opposed Government proposals to raise Capital Gains Tax for second home owners and property investors, while 26% of landlords polled by LSL would consider selling their property before the higher tax is introduced. Proposed tax increases might have an even bigger effect on future investment in the private rental sector. 71% of landlords surveyed stated that an increase in Capital Gains Tax will make them reconsider future investment in property. Although the profitability of property investment is determined by a combination of rental income and Capital Gains, landlords appear to place most importance on Capital Gains. Simon Endley, CEO of LSL Property Services now comments "over the past 2 years, investment properties have accounted for 30% of sales across our network — over 40,000 transactions. Foisting a tax hike on property investors will drive many from the housing market at a time when its recovery is still comparatively fragile. If potential landlords are discouraged from investing we are losing a large proportion of the demand for house purchase and house prices may fall. A further fall in house prices will see more home owners in negative equity, potentially triggering a significant rise in repossessions, as lenders lose confidence in the market. Prudent property investment is a long term venture and the new Government needs to take this into account, not penalise it." However, on the other hand, the latest Agency Express Property Activity Index shows that the UK housing market received a massive boost last month with the abolition of Home Information Packs which contributes to a significant increase in housing activity. In May there was a 13.6% increase in the number of homes being put up for sale which is up 89.4% on April 2009’s level. It was the highest level seen for more than 2 years (since April 2008). There was also an increase in the number of properties sold in May with activity up 8.6% on April and 17% up on May 2009. May’s sales were the third highest monthly level since April 2008. Stephen Watson, Managing Director of Agency Express states "it appears that the result of the General Election has had a direct and positive impact on the housing market. The decision of the new coalition Government to immediately suspend the requirement to have a HIP seems have taken away a significant obstacle that has been discouraging home owners from putting their properties up for sale". So there we have it, on the one hand changes to Capital Gains Tax may be discouraging second home owners and landlords from retaining their property whilst on the other hand the suspension of HIPs has had a much more positive reaction. It just goes to show you cannot please everyone ! 22 April 2010 World Economy Outlook — the ongoing recovery … The International Monetary Fund (IMF) says the world economy is recovering from the global crisis better than expected, but sees activity reviving at different speeds in different parts of the world. In its latest world economic outlook, the IMF said among the advanced countries the United States is off to a better start than Europe and Japan. Among emerging and developing countries, emerging Asia is leading the recovery, whilst emerging European and some commonwealth independent states' economies are lagging behind. China's growth is forecast at 10% in 2010, with India also at a rapid 8.8%. Sub-Saharan Africa has weathered the crisis well and its recovery is expected to be stronger than in previous growth downturns. In the depth of the crisis last year, world economic activity contracted by 0.6% as the world trade slumped and credit froze up. IMF Research Department director Oliver Blanchard told a news briefing in Washington "we find ourselves at an important new stage of the crisis. A global depression has been averted. The world economy is recovering and recovering better than we previously thought likely, but achieving strong, sustained and balanced growth would require more work, lending fiscal consolidation in advanced countries, exchange rate adjustments and a rebalancing of demand across the world. The Bank of England has admitted that rising inflation in the UK currently at 3.4%, well above the Government's 2% target - is the source of some concern. Figures released earlier this week revealed that inflation increased from 3% in February to 3.4% in March. Minutes from the Monetary Policy Committee (MPC) monthly meeting revealed that inflation is likely to stay comfortably above the long term target of 2% for some time yet. Rising inflation is hitting savers in the pocket. The basic rate tax payer now needs to find a savings account paying at least 4.25% interest to prevent their savings pot being eroded, of which there are just 44 available on the market. For a higher rate tax payer, the challenge is to locate a savings account rate of 5.64%, a return only currently available through 4 accounts. It comes at a time when interest rates are historically low, further penalising savers. Minutes from the MPC's meeting also revealed that the decision to freeze the base rate of interest at 0.5% - a level that the rate has been marooned at since March 2009 - was taken unanimously. According to recent news reports, David Jones, Chief Financial Officer of the Northern Rock, has left the company with immediate effect to concentrate on the ongoing FSA investigation. Hugh Graham, head of Northern Rock's Treasury Operation, has been appointed interim CFO. Last week, the Financial Services Authority fined David Baker, formerly Deputy Chief Executive of Northern Rock plc, £504,000 and Richard Barclay, formerly a Managing Credit Director at Northern Rock £140,000. More critical Illness claims were paid out than ever before in 2009, as the problem of non-disclosure appears to be eradicated from the protection industry, a new survey from Investment Life & Pensions Money Facts has revealed. According to the research, insurance companies paid out an average 90.5% of all critical illness claims last year, upping the figure of 88.4% reported by Life Search in 2008. However, even more encouraging is that just 1.9% of claims were rejected on the basis of non-disclosure, where the claimant has been adjudged to have withheld pertinent information during their application for the policy, compared to 2.5% in 2008. Richard Eagling, Editor of Investment Life & Pensions Money Facts said "with the non-disclosure having long been a contentious issue in the critical illness industry, it appears the efforts of providers and the Association of British Insurers (ABI) to tackle the problem are fully being rewarded. The improvement in the claims statistics can only serve to improve confidence in the critical illness proposition. Finally, a snap pole recently conducted finds that six out of ten workers (58%) would job share, potentially saving the UK economy £5.1 billion in welfare expenditure. New figures to be published shortly expect unemployment in the UK to reach 7.8%. In March the number of unemployed people was £2.45 million and the number of people in full time employment was £21 million. If half of the £21 million employed is willing to reduce their number of working days from five to four, this would see one job created for every five people; potentially creating 2.1 million jobs and saving £5.1 billion in unemployment benefits. Now that's worth thinking about. 26 March 2010 Stamp Duty Easing First-time-buyer's path to home ownership … The Chancellor has just announced a Budget sweetener for the housing market by scrapping Stamp Duty on first time buyer property purchases up to £250,000 during 2010 and 2011. The measure will be paid for by increasing the Stamp Duty tax rate to 5% on all properties costing over £1 million pounds so that is, "not a burden on the public finances" according to the Chancellor. The new Stamp Duty is introduced from Friday 26 March and the new higher £250,000 tier doubles the current tax-free threshold from £125,000 and will see the vast majority of first time buyers now escape the tax. It goes far further than the temporary £175,000 tax-free threshold that had been in place since September 2008 to help stimulate the first time buyer market, and which was only recently brought back down to £125,000 on the 1 January 2010. Despite the Chancellor promising no give-aways on the run up to the Budget, this move was seen as a sweetener and an attempt to trump the Tories, who had pledged back in 2007 that they would scrap the tax up to £250,000 for first time buyers. Indeed, informed sources comment that, "removing the burden of Stamp Duty all the way up to £250,000 will be a real boost to the beleaguered first time buyer. First time buyers are faced with the difficulty of raising a significant deposit to secure a mortgage, so that as an incentive that could be worth as much as £2,500 has to be a positive move". It may not lead to a sudden surge of first time buyers entering the market but it will go some way towards easing their path to home ownership. Mortgage lending increased by 6% in February to £9.3 billion pounds according to the Council of Mortgage Lenders. The announcement will quell the fears of those of those who worried that January's drop in lending marked the start of a "double-dip" for the housing market. It now looks like the winter weather and Stamp Duty distortion did indeed cause a New Year blip that has now corrected itself. The Lenders' Trade Body admitted that a 6% increase in lending during the shortest month of the year was "unusual", but put it down to the skewed picture painted in December, as people rushed to beat the Stamp Duty change before New Year, causing a spike, then a January fall. The Council of Mortgage Lenders (CML) points to a similar volatility in house price indices over the last few months, something it expects to continue, as its economist, Paul Samter, explained: "Given the short term weakness and distortion in the housing market, as well as more properties coming onto the market, it was perhaps unsurprising to see falls in some of the monthly house prices indices in February. With activity unlikely to pick up much in the short term, we would expect to see continuing price fluctuations in the coming months". Despite the monthly rise in lending, the February figure is actually down 6% from £9.7 billion a year earlier, although the CML pointed out that lending in 2010 is currently on track with its forecast of £150 billion for the whole of the year. Despite the annual drop, Samter is positive about the road ahead: "As we look forward, we expect emerging signs of improvement as confidence in the economy grows and we move past the election" he stated. 10 March 2010 The Mortgage Market Does 2010 bring fresh hope for home owners & house buyers ? House prices appear to be rising with increased activity amongst first time buyers and home movers. There may be room for cautious optimism but the increase in activity needs to be sustained throughout the Spring and Summer months before we can say that the housing market is properly back on its feet. Lenders seem to be helping more now. Most of the national institutions such as the Abbey, Halifax, Lloyds/C&G group have come into the market place with competitive 90% loan to value mortgage deals. Up until recently these were not available, and the few on offer were at extortionate rates of interest. Maybe lenders now feel that there is less risk involved in giving a 90% mortgage, on the basis that property prices should at least be maintained if not increased. Consequently buyers only now need to find a 10% deposit which is helping first time buyers get on the property ladder. The expectation is for interest rates to remain at this level for the foreseeable future, perhaps until the Autumn. Interest rates will only rise when the Government feels that we are not in danger of dropping back into recession, and are likely to go up on a gradual basis so that the increase in monthly mortgage payments is modest. Any sharp increase in rates is likely to set the economy back and therefore do more harm than good. All of this is unfortunately bad news for savers, who have seen the return on their investments dwindle to the point where the interest earned is not even keeping up with the rate of inflation. It is worth investors shopping around and perhaps seeking an opinion from a financial adviser, on what options might be available other than the High Street deposit account. There are a number of structured savings accounts available which offer a guaranteed return of initial investment with the potential of very good growth, if you are prepared to tie your money up for three to five years. Please refer to the disclaimer at the foot of our Home Page, regarding this website's content & the role of Personal Financial Services Limited. |
|