Economic Interests

If you owe the bank £100, that's your problem. If you owe the bank £100 million, that's the banks problem.

Archive for the tag “Mark Carney”

A Recovering Britain?


The new Bank of England Governor, Mark Carney, has shown impeccable timing. He leaves Canada in the best shape of the G7 members, boasting GDP at least 5% higher since the crisis began  compared to Britain, where GDP has still yet to catch up to its previous peak.  But he also leaves the country with some long term problems that he won’t have to deal with. Canada is facing a rising debt problem as more and more consumers are borrowing money they don’t have. This is compounded by Mr Carneys low interest rates, which are needed to boost growth but are now encouraging reckless borrowing. Growth is also slowing this year, with the Canadian central bank now cutting projection for the next few years.

As this graph shows, Britain is experiencing a worryingly slow recovery compared to previous years, with GDP still somewhat below the 2008 peak.  

In contrast he arrives in the UK at a possible turning point.  After five years of a deep recession followed by a failed recovery, the statistics are now finally pointing to better times. Manufacturing and construction are growing, consumer confidence is improving and new schemes to help boost lending and property buying seem to be working. GDP is set to grow at around 1% this year if the economy stays on track and unemployment is staying low compared to the rest of Europe.

Yet there is an underlying problem in Britain’s economy that will prove hard to fix for the new Governor.

The average wage in the UK has declined by 5.5% since mid 2010 when adjusted for inflation, falling further than some of the worse off countries in the EU like Spain. This won’t surprise Britons, where the cost of living is squeezing the incomes of many households. As wages have remain restricted since the recession by companies that can either not afford the higher costs or are simply taking advantage of the desperate workforce, inflation has been increasing at between 2-4% a year. This can particularly be seen in the steep rises of energy bills, which have  more than doubled in the period from 2004 to 2011. More price rises are set to happen in the future too, with some energy companies suggesting bills will be £100 more than government projections state for 2020.

As this graph shows, Wages and inflation have diverged negatively since the recession, squeezing real incomes. Found at http://www.economicshelp.org/blog/6994/economics/uk-wage-growth/

Even the new positive growth numbers hide this problem. Instead of salary rises, people are turning to borrowing again to supplement their income. Personal debt has increased by £4 billion in the last year and is worryingly becoming a necessity for families to keep up current costs, along with benefits. If growth recorded in the first quarter at 0.3% had been based on wages, it would have fallen by more than 1% and pushed Britain into recession. A real recovery will need wage growth to create real growth. Otherwise a debt inspired recovery could see interest rates start to rise, leading to costlier interest payments on the debt held by consumers, leading to more defaults and another market crash.

A worrying trend is that of the zero hour contracts, where companies do not have to stipulate what hours an employee is working each week. Additionally, they don’t have to provide the employment benefits that full time employees receive like sick pay and maternity leave. Regulation is lighter in such work places and offers no real job protection, leaving the employees less likely to spend freely if they don’t have a consistent salary or job. This can only harm the economy’s recovery at a fragile time.

Yet there are some positives. Unemployment has stayed relatively low in the UK since the recession because of the countries flexible labour market. Instead of industry wide lay-offs, companies were able to lower salaries to keep people employed. This was healthy, as employees on low wages were better than the unemployed claiming benefits. But with the economy now trying to recover, there is no longer that fear of a market crash to hold companies back from increasing wages.

Unemployment has remained steady and relatively low compared to the rest of Europe, when unemployment is more than double in Britain’s in countries like Greece and Spain. Found at http://www.goldmadesimplenews.com/analysis/unemployment-in-the-uk-rises-to-7-8-as-real-wages-have-go-down-for-nearly-5-years-in-a-row-9951/

The problem is that while consumer have been able to borrow money freely, companies are finding it a much harder task, especially the smaller and medium sized firms that employ the majority of the population. Banks, the biggest lenders to businesses, are focusing on building up their capital for new regulations, meaning they are averse to lending money to companies that don’t have the size and market share to guarantee their loans. There is a lack of a genuine back up to the banks for smaller companies, in contrast to the bigger companies that can lend from the international markets for affordable rates. This is restricting both current companies struggling to grow and new ones trying to enter the market.

 

This affects the public, as investment improves productivity which tends to influence higher wages. Right now business investment is down by a third since the recession, productivity has declined despite more people being in work and real wages have therefore fallen. Astonishingly, the UK ranks 159th in the world for its investment to GDP ratio.

The solution is therefore to improve the market for lending to small and medium businesses. This is easier said than done. Banks are still a long way off from their pre-recession lending rates; especially with two of the biggest banks still part owned by the government. People are wary to see banks go back to that sort of lending anyway, with bankers lending recklessly and risking too much money. But a middle ground must be found to provide capital to the rest of the market. Different lenders must be found as well; in America banks share a much a lower percentage of the lending market than in the UK and Europe, one example of why America has outperformed both since the recession. One such example is peer-to-peer leaning, where the two largest providers in the USA lent over $1.7 billion in the last five years. One recent improvement has been the “Funding for Lending” scheme which gives incentives to banks to lend by offering money that can only be used to lend to businesses.

Britain is further ahead than the rest of Europe in solving this problem and is thinking outside the box to improve the economies main weakness. If lending can pick up and even better without having to rely solely on the biggest banks, then investment can pick up and wages could start to grow.

It’s not the recession but how the country recovers that will come to define Britain.

Advertisements

Governor Carney


The new Bank of England Governor will be Mark Carney. 

The new Bank of England Governor was released at the start of the week, with the candidate rather surprising to most speculators. Mark Carney will leave his lead post at the Canadian Central Bank and take over at Britain’s next July. It was a surprise as he publicly and privately rejected the job, with many making Paul Tucker the favourite. Paul Tucker is the current number two and knows the inner works of the bank well, but was criticized for being too similar to the current Governor, Sir Mervyn King.  There was an urge for something different after the Bank was caught cold in the financial crisis of 2007, reacting much slower than other central banks. Mark Carney couldn’t be accused of such an act, as he was one of the first central bank leaders to cut interest rates drastically in Canada. He is indeed the best candidate available, with heavy central bank experience and importantly global knowledge (as the only non-British candidate that was considered). But what sort of direction will he lead Britain as the Central Bank gains more and powers, and was it worth the hassle?

As head of the Bank of England, Mr Carney will hold more powers than previous governors have possessed. Alongside the control of monetary policy (manipulating interest rates to control inflation) and quantitative easing (the printing of British money), Mr Carney will also supervise individual banks and have extra tools to control lending in the British economy. This is a lot of responsibility, but Mr Carney has a good track record. During his term as the head of Canada’s central bank, they proved resilient to the worst of the financial crisis (with one the shortest recessions in the rich world), while none of their banks had to receive a bailout (a rare event at the time). He also heads the FSB (Financial Stability Board), an international body that coordinates the regulation of the financial world. Alongside this he studied at Harvard and Oxford, had practical experience of the financial world by working at Goldman Sachs and is respected by most of the business people he interacts with. That would be a large difference from Sir Meryvn King, who is largely disliked in the private sector for his bank bashing and over-the-top panic calls.

Sir Mervyn King is disliked in the financial world. 

The big question marks he will face are over the commercial banks that are so vital to Britain’s economy. Sir Mervyn King has spoke out recently about debt bombs that are still waiting to explode in the banks systems, arguing they need more capital built up still to ensure their safety against the Euro crisis. While many suggest this to be a bit extreme (with a EU break-up looking less likely), British banks are still not as secure as say, American Banks, which went through vigorous stress tests to ensure they were safe. RBS and Barclays are two of the top five under-capitalised banks in Europe, while RBS is likely to face large fines in its involvement in the Libor scandal. Mr Carney is likely to ensure this changes; with a history of backing tough regulation as chairman of the FSB, while as head of the Canadian Central Bank he used his position to make public any grievances he had over the banks. Another upcoming problem is the popular demand that banks split up their investment arms away from the retail side. It’s hard to predict what direction Mr Carney will take on this, but in Canada the top six banks all have large investment arms, with Mr Carney not challenging them so far to split up their businesses. Finally there is the matter of QE, which the Bank of England has used regularly to help boost the economy. In Canada, Mr Carney has yet to print any money, instead promising to keep record low interest rates (at one point just 0.25%) over a set time, something the US Federal Bank has replicated recently. But the Canadian economy has fared a lot better than the British economy has in the last 5 years, so it hard to suggest he is against QE completely. But with the Bank of England already having spent £375 billion, it is unlikely Mr Carney will want to print more money any time soon.

This chart found at the Telegraph shows RBS had the lowest capital ratio of the British Banks. 

But was Mark Carney worth all the hassle it took to get him? Chancellor George Osborne has spent the year convincing him to take the job, even going to the extremes of offering him £624,000 a year (far more than the current incumbent, Sir Mervyn King), relocation and accommodation allowances and has cut the offered term time to 5 years from 8 years at Mr Carneys request. Such effort to get this candidate seems over the top, but then he is a well qualified candidate in a top government position, with even more powers than his predecessor. The pre-favourite Paul Tucker may feel hard done by that such expense was made to give his rival the job, but Mark Carney was a much better candidate at the end of the day.

Paul Tucker was largely pushed to the side in the chase for Mr Carney. 

George Osborne will feel glad he has managed to pull off such a coup after a poor year in which his budget was heavily criticized and he was himself booed at the Olympics. Britain now has a world class Bank of England Governor that will hopefully fix its banking sector and ensure that Britain once again becomes a leading nation in the financial world. The cherry on the top is that for the first time in the banks history, a foreigner has been appointed the top position. For a nation that is trying to naively cut immigration figures by restricting student visas, it is a great sign of the countries openness.

Post Navigation