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Britain: a case study in low-growth economic mediocrity

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ALLISTER HEATH

BRITAIN is stuck in a rut. No wonder that investors and credit rating agencies are losing patience: the coalition doesn’t have the guts or decisiveness needed to jolt the UK out of its present mediocrity, while the opposition is busy dreaming up new taxes, thinks that a slightly looser fiscal policy would transform our prospects and has no real understanding of the extent of our fiscal crisis.

Britain’s tax receipts confirm that the economy continues to do poorly, albeit not disastrously. So far this fiscal year, receipts from Vat are up 2.2 per cent, less than the rate of inflation. Income and capital gains tax receipts are down 0.2 per cent and corporation taxes are down 8.4 per cent: while in both cases there have been tax cuts (a higher personal allowance and lower corporation tax rates) these don’t explain such shockingly bad numbers. Very limited pay rises, a drop in reported income from the highest earners and weak profits are among the answers. National insurance contributions are up a healthier 3.4 per cent, though this not anything worth shouting about.

What all of this suggests is an economy that is either stagnating or growing a little, but by no more than a few tenths of a per cent. At best, the situation looks only marginally rosier than the official GDP figures; at worst, there is no difference. Mediocrity undoubtedly rules OK.

While revenues are poor, any progress the government is making in trimming overall expenditure on wages, benefits and other current spending is being more than cancelled out by increased interest on the growing national debt. During April 2012-January 2013, central government current expenditure hit ?525.7bn, 2.7 per cent higher than in the same period of 2011-12.

Depending on which measure of inflation one uses, real current spending was therefore either up or down slightly. The real cuts are happening in capex, the one area where state spending can be useful for long-term growth (though the private sector, if it were allowed to, could take over many projects). So far this year, central government net investment was minus ?6.4bn – with depreciation overwhelming gross investment – a massive ?27.7bn lower than in the same period of the previous year. So we are still seeing the wrong kinds of cuts, stagnant growth and weak tax receipts. Unless something drastic changes soon, it is not just credit rating agencies that will be running out of patience with the government.

LOW RETURNS
One of this column’s themes is that we are now facing a world of low real returns across financial assets, with high inflation gobbling up nominal gains, and that the bond markets, after years of astonishing returns, are set for a crash. There is lots of evidence to back up this thesis in Barclays’ latest annual equity-gilt study. The conclusions are stark. Over the next five years, Barclays expects cash to provide negative inflation-adjusted returns of about -1.5 per cent per year (with compounding effects, that means a very sharp drop in value), “safe haven” government bonds -2 per cent – in other words, even worse than cash – and equities annual growth of 3-4 per cent. The authors believe that the bull market in government bonds – which peaked last year – will end in a whimper, rather than in a 1994-style crash. I suspect the authors may be too optimistic, but their case is that a shortage of “safe” assets, combined with a decision by the authorities to keep the monetary floodgates open, will do the trick. One thing is clear: savers are going to suffer.


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Brobbey

ING names new chief executive

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CATHY ADAMS

Dutch bank ING this morning confirmed that Ralph Hamers will succeed Jon Hommen as chief executive in October.

Hamers is currently chief executive of ING Belgium, and has been in the role since 2011.

Hommen, whose four-year term on the executive board will expire after the AGM in May, has headed up the Dutch bank since 2009.

     
     
  Brobbey  
 

ADDRESS: 45 Earlham Gro

CITY: Forest Gate

COUNTY: London

POST CODE: E7 9AN

TELEPHONE NUMBER: 0208522 0119

CATEGORY: Fashion Shops

 

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FTSE rebound led by mining shares

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CATHY ADAMS

The leading share index staged a rebound this morning, led by mining shares.

In early deals, the FTSE rose 0.6 per cent after suffering its sharpest one-day fall yesterday since July on concerns that the US Federal Reserve could wind up stimulus programme sooner than expected.

Headline miners made up the top five FTSE risers this morning – as metal prices rallied – with Kazakhmys leading the pack, up 2.74 per cent.

Russian precious metals miner Polymetal and steelmaker Evraz were both up 2.2 per cent.

Outside of the miners, luxury retailer Burberry was up 2.2 per cent, and industrial buyout specialist Melrose rose 2.1 per cent.

Mid-cap miners and oil shares were also doing well, with Finnish miner Talvivaara up 7.2 per cent and Fortune Oil rising 4.6 per cent.

A mixed bunch of shares made up the FTSE fallers this morning. G4S topped the blue chip loser board, shedding 1.4 per cent.

Education group Pearson, which also owns the Financial Times, sank 0.8 per cent.

Brewer SAB Miller fell 0.4 per cent in early trading. Yesterday Morgan Stanley initiated its coverage of the stock with an “equal-weight” rating and a target price of 3300p.

On the wider index, Indonesian coal miner Bumi fell 4.2 per cent, as the majority of board overhaul proposals from company co-founder Nat Rothschild were rejected at the company’s EGM yesterday.

UK banking shares were mainly in positive territory this morning. HSBC rose 0.56 per cent, Barclays was up 1.17 per cent and Lloyds Banking Group rallied 0.89 per cent. Only RBS fell, shedding 0.39 per cent.

In Asia, the Nikkei closed up 0.68 per cent and in the US, the Dow Jones closed down 0.34 per cent.

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