Tag Archives: George Osborne

Banking, Britain, Economic, European Union, Financial Markets, Government, Society, United States

What the banking crash five years ago has taught us…

BANKING FIVE YEARS ON

THE last five years have been the most nerve jangling and traumatic in the modern history of the British economy and for the City of London.

It is only now, on the 5th anniversary of the collapse of the 158-year-old investment firm Lehman Brothers – and after intensive ministrations from the Bank of England – that the UK economy has started to splutter back to life.

However, the banking sector, which should be a bedrock of the economy, remains vulnerable and susceptible to external shocks, and to scandals of its own making.

The Central Bank administered strong economic measures, namely in the form of a staggering £375 billion of extra cash into the UK financial system.

It has held the official bank rate at a historic low level of 0.5 per cent for more than four years and it is currently heavily subsidising the cost of buying homes as well as supporting smaller enterprises through its Funding for Lending scheme.

Finally, it appears to be working, and forecasters are quickly revising their predictions upwards as every part of the economy – from the dominant services sector, to manufacturing and construction – has begun to take off.

In the Chancellor’s March Budget, the independent Office for Budget Responsibility (OBR) predicted that gross domestic product would expand by a miserly 0.6 per cent this year.

The Paris-based OECD has doubled its forecast to 1.8 per cent and some City forecasters say the economy is expanding by as much as 3 per cent.

House prices are moving up firmly in many areas and not just in overcrowded and overcooked London and the South-East.

The jobless rate is currently 7.7 per cent and falling more rapidly than many critics could have imagined.

But it would be wrong to get carried away. UK output is still 2.8 per cent below where it was before calamity struck in 2008. In contrast, the German economy has expanded by 2 per cent and the United States by 5 per cent.

Despite the new born optimism of many British forecasters, it is safe to say that the whole edifice of the UK upturn is built on worryingly fragile foundations.

No doubt, the most important lesson of the terrifying events five years ago is how important a functioning banking system is to the creation of wealth.

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ACCORDING to the former Chancellor, Alistair Darling, Britain was ‘on the brink of what could have been a complete and utter calamity’.

Cash machines at the Royal Bank of Scotland and Lloyds Banking Group came within two hours of running dry. The economy’s restoration to full health cannot possibly happen until these two banking High Street giants have been restored to the private sector.

Yet, half-a-decade on from the near collapse of these two banks, the struggle over how to re-privatise them is nowhere near being resolved.

Consider RBS. Stephen Hester, the man brought in on a salary of £1.2 million by Gordon Brown to turn the bank around, resigned after a fractious relationship with Chancellor George Osborne. At the behest of the Parliamentary Commission on Banking, merchant bankers NM Rothschild is investigating how to split off RBS’s flawed investment-banking arm from the retail operation that serves the public and small firms.

Until it reports, the important job of extending credit to new and growing businesses has been put on hold and the process of returning the Government’s 80 per cent in the bank to the public has been suspended.

Lloyds, though, does look in far better shape. Under an EU ruling, it has separated out 632 High Street branches and relaunched them under the revised TSB banner.

But its return has been less than smooth.

In the aftermath of the financial crash, the bank emerged as one of the biggest providers of Payment Protection Insurance (PPI) policies in which customers were mis-sold expensive insurance schemes to cover debt repayments. It was required to spend £4.3 billion in compensation, part of an industry wide bill of some £14 billion.

PPI is just one of the egregious scandals to emerge since the financial crisis. In June of 2012 Barclays Bank agreed to pay a fine of £290 million for rigging the LIBOR interest rate that helps to set the cost of corporate loans, mortgages and other commercial transactions.

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BRITAIN’S highest paid banker, Bob Diamond – who earned more than £100 million in his years at Barclays – was forced to resign.

Even the most respected and safest names in British banking have found themselves in the dock.

The mighty HSBC admitted it had been involved in money laundering activities for Mexican drug cartels and Middle East terror groups.

London-based Standard Chartered was forced to own up to billions of pounds of sanctions-busting transactions with Iran.

And to top it all, the world’s largest and most blue-blooded bank of all, JP Morgan lost $6 billion in 2012 at its London branch after engaging in high risk trading in credit default swaps.

There are now signs, at least, that regulators in the U.S. and Britain have forced a clean-up of our banking system by imposing heavy fines and penalties and by forcing the errant institutions to accumulate fresh capital.

But looming over the City is the spectre of the eurozone, which is caught in a ‘doom loop’ – a self-perpetuating cycle that relentlessly racks up both national debts and those of banks.

The recovery, then, at best is being built on the most fragile of foundations.

Even if our banks manage to overcome the already formidable problems, the medicine itself already used poses its own future dangers in the shape of surging inflation and higher interest rates that could eventually be as frightening as the events of five years ago.

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Britain, Economic, Energy, Environment, Government, Politics, Society, Technology

Fracking and drilling for shale gas…

SHALE TRAIL

Will the UK Government’s latest ‘dash for gas’ with fracking be a golden repeat of the North Sea oil boom or become a serious risk to public health and safety?

Opinion is divided between green opponents of attempts to cash in on the controversial resource and those proponents who argue vast deposits of gas below much of the country will dig Britain out of its energy crisis.

The debate has been stoked following claims in June by the British Geological Society that there could be more than 1,300 trillion cubic feet of shale gas under the North of England alone.

At current predictions, around 10 per cent of this should be recoverable – enough to fuel the nation for about 40 years, according to supporters.

And last month Chancellor George Osborne unveiled some of the most generous tax breaks in the world to kick-start this energy revolution in Britain.

The Treasury says that taxation on shale gas will be cut from 62 per cent to just 30 per cent, which the Chancellor reckons could boost investment in the industry to £14 billion a year.

It won’t just be companies that will gain. Local communities in those areas where extraction takes place will scoop 1 per cent of production revenues, as well as £100,000 per fracking well.

The United States has already benefited from its own shale gas boom, relying far less on oil imports now and providing energy consumers with a much cheaper alternative. According to the ratings agency Moody’s, the shale gas boom in America has generated more than 1 million US jobs.

For investors, too, the potential is huge.

If fracking’s potential is as good as we’re being told it could be, there will soon be a surge in profitability, rising share prices and attractive returns on offer for shareholders of those firms leading the charge. While there remains a long road to travel yet in terms of legislation and testing, the excitement building in the City of London is tangible.

Companies with licences for British shale areas have understandably welcomed the tax break announcements by the Chancellor. Those set to benefit include Aim-listed IGas and Dart Energy, equipment-maker John Wood Group and British Gas-owner Centrica – which acquired 25 per cent of Cuadrilla Resources in June.

Of course, the environmental concerns have to be weighed against the commercial benefits. But even the most ardent green lobbyist must recognise that Britain is facing a crisis of epic proportions when it comes to security of energy supply.

The UK is already a net importer of gas. Any interruption in supplies risks hiking up domestic and business energy bills or even seeing some customers cut off. Our coal-fired plants are closing or already shuttered.

Meanwhile, nuclear energy is in disarray with no new plants likely for at least another decade. There is still no sign of agreement on the crucial strike price – the guaranteed minimum EDF would get for power generated at a new plant.

Green technologies like wind are as yet incapable of fulfilling all our everyday energy needs.

The introduction of a tax regime that levels the playing field for shale gas with small offshore oil and gas fields must surely be a welcome step in the right direction.

But the industry will need to be tightly regulated to minimise the chances of something going wrong. Lobbyists have legitimate concerns over the chemicals used in the fracking process contaminating local water supplies, and the anecdotal evidence elsewhere that drilling for shale gas can increase the risk of earthquakes.

Drilling and fracturing must be strictly controlled. Three government agencies, plus the local authority, will have to sign-off on every project. Environmental impact assessments will be necessary along with permits to be agreed before fracking begins.

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Britain, Economic, Financial Markets, Government, Politics

UK economy: Growth is returning and the signs are promising…

SPENDING REVIEW

The Chancellor, George Osborne, is determined to stick to his guns, with yet another £11.5 billion of budget cuts to be delivered in an election year. Some may say this is a massive gamble for a Conservative Chancellor who will wish to see his party elected at the next general election.

But the Chancellor has to retain the confidence of the financial markets by showing he is willing to tackle the legacy of deficit and vast levels of debt left by Labour.

If the markets no longer have confidence in the economy, Britain’s low interest rates, which are so vital a component to recovery and growth, will come to a shuddering-halt. If that was to happen, many would face financial disaster.

The first fruits of Mr Osborne’s determined approach is seen in the latest publication from the Office of National Statistics which has presented its revisions of gross domestic product (GDP), the key measure of the total output of the economy.

After a dreadful couple of years, the economy appears to be genuinely on the mend. In the first three months of this year it recovered healthily, despite some poor weather which usually slows down performance, but this trend is confirmed by all the major economic indicators and surveys.

The influential National Institute of Economic and Social Research, an often stringent critic of the government, says that output expanded by 0.6 per cent in the last three full calendar months.

This means that the ‘modest recovery’, often referred to by the retiring Bank of England Governor Mervyn King, is well and truly underway.

Earlier estimates of GDP underplayed the actual health of the economy. Early estimates of construction activity, for example, fell short of the true picture. Building programmes ranging from shopping centres in Leeds, to new office towers in the City of London, as well as new homes being built across the land is evidence of that.

The building industry certainly looks to be doing much better than was previously thought. It is this improvement – together with a formidable robust service sector, sharply better production from the North Sea, and higher export levels (especially to America) – that is turning the economy round.

According to fund managers Henderson of the City of London there has been a strong pick-up in the amount of money circulating in the economy. They suggest that, on current trends, the UK could be among the fastest-growing leading Western nations this year, expanding by a remarkable 2 per cent.

In his House of Commons address, Mr Osborne hinted at the underlying strength of the economy. He pointed out that for every one public sector job that has been lost as a result of austerity and cost cutting, another five have been created in the private sector.

Essential to the delivery of continuing growth, however, will be the discovery of new markets for Britain’s goods and services – not least because of the appalling health of the economies of our major trading partners in the European Union.

The Chancellor said that one of the keys to this will be a ‘strengthening of trade and investment links with China’. As a spending priority, the Government is planning to work with Britain’s exporters to set up a series of centres to promote British goods and services in China’s fastest-growing cities. Switching the focus from Europe to the new wealth-creating economies of Asia is going to be critical for our continuing recovery.

In the meantime, however, it is Britain’s close trading and financial relationship with the United States and its recovering economy that is proving most important to export-led growth. Exports of both goods and services to the U.S. have been climbing strongly in recent months.

Amid the intense interest with what is going on in Brussels and the eurozone, it is often forgotten that America is by far our most important single marketplace. The UK exports to the U.S. everything from Rolls-Royce engines to defence equipment as well as music made by British iconic figures in our pop industry.

No one, though, should underestimate the task of what the government is faced with in building up the economy to the peak it reached before the 2008 financial crisis.

The UK’s debt is continuing to climb despite the cuts and will not reach its height until 2016, when it will be the equivalent of an alarming 93.2 per cent of the nation’s output according to the latest IMF forecast.

If items such as public sector pension liabilities, which are hidden from the country’s balance sheet, are included, our debts will actually exceed national output in 2016. The Chancellor’s latest reductions in spending, in fact, represent less than 0.1 per cent of the national debt as projected in the year 2015-16.

The Chancellor’s trimming of the national budget, despite the hysteria of hard-hitting cuts, is no more than a holding operation designed to stabilise market confidence between now and the election.

The arrival nest week of the new Bank of England Governor, Mark Carney, poached from the Bank of Canada, has the task of not just keeping inflation close to the Government’s 2 per cent target but also to support growth.

Now that the housing market finally appears to be recovering from the shock of the financial crisis, and more small and medium-sized businesses are taking out bank loans to expand, any increase in interest rates by Mr Carney would be the last thing the Treasury needs. Mr Carney will chair his first meeting of the interest-rate-setting Monetary Policy Committee next week and will set in place the new mandate for the Bank of England as outlined in the budget.

Mervyn King has warned of the dangers this would pose in terms of homeowners struggling to pay mortgages and the loss of confidence in business circles.

The financial markets, it should be remembered, are still extremely jittery. The mere suggestion last week that the United States might curb its huge amounts of quantitative easing (Q.E.) – or printing money – sent share prices crashing across the globe. Mr Carney will want to prevent that happening at all costs, as will the Chancellor.

State spending reductions, while necessary and essential to calm the markets, can only make a small dent in Britain’s deficit and debt. It is higher-than-expected growth that could radically alter the picture.

The greater the output of the economy, the more taxes are paid – and the less money is paid out in welfare benefits because so many more people are employed.

If Mr Osborne can deliver sustained growth by the election, he would then be in a strong position to be even more radical, by taking a long-overdue axe to Britain’s mammoth social security bill – by removing, for example, many generous benefits to wealthy pensioners – and put the economy on a path to true prosperity.

 

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