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Understand the Economy.

A glimpse of the wider economic world.

Oil Demand is Set to Soar

(21:00 Friday 11th March 2005 news story)

The demand for crude oil is set to grow faster and faster through 2005, "fuelled" by China's unstoppable appetite, warns a new report.

The International Energy Agency said that demand would rise by 1.8 million barrels a day to 84.3 million. It points to key factors of intensely cold weather, and strong growth in the US and China. The current oil prices are over 50 dollars per barrel, but this has not risen on the back of this report.

With demand outstripping supply, and resources dwindling, there appears to be no possible let up, ever, in the price of oil. Only when there is a viable alternative, or there is global recession, will oil prices possibly come down to 20th-century levels.

The impact on households will first appear in petrol or diesel for the car, followed by increasingly higher electricity and gas bills. Reducing our exposure to this would be to reduce our usage of the car, or possibly selling it, and to continually shop around for the cheapest alternative household fuel supplier. Start to think about conserving energy use at home too: light only rooms that are in use and with efficient lamps, cut central heating usage and at lower settings, install cheap but effective draught excluders because some nights, the well-insulated home need not be heated to be comortable. There are so many ways we can avoid being hurt by a fuel crisis.

There are a few ways that we can take advantage of the situation too. There are a few investment funds out there that focus on only oil and energy stocks. We could simply buy a portfolio of oil shares. There's one or two big guns in the FTSE-100, if you can afford to shell out. Or why not take a look at alternative-energy firms?

To live purely within the doctrines of The Surgery, is to live with no car. It is also to live in a mortgaged, or owned-outright home, that is heated only when absolutely necessary and in the dark recesses of the winter months. Our web site contains all the secrets for maximising one's ability to get money and to save money, in order to get rid of debts as quickly as possible. Don't be careless, be carless, and save a fortune.

Uncanny Economic News

(Saturday 5th February 2005 news story)

Following on from our article of yesterday, below, concerning the value of Halifax's competitive 5.7% 5-year-fixed mini-cash ISA account, we have just received some reliable economic forecasts for Britain that point to another DOWNTURN in base rates. The report from Capital Economics actually mentions all of the factors that we listed yesterday which the Bank of England would regard as requiring stabilising by reducing interest rates until balance is reestablished.
As we discussed, a downturn in interest rates would make medium-term fixed-rate savings accounts, with market-leading interest rates, much more viable over their term compared with the best variable-rate accounts on the market.

The report makes the following predictions for 2005 that bear a remarkable similarity to the "possibilities" which we suggested would "conspire to force the Bank to pull its base rate back down":

• The year 2005 will see the lowest growth in consumer spending since 1992, following-on from the pre-Christmas slump.
• House prices will fall 20% over the next 2 to 3 years.
• Taxes will rise, "to get the public finances back on an even footing" according to Chancellor Gordon Brown.
• Household debt will remain a heavy burden, with debt repayments relatively high compared with income despite low interest rates.

The report predicts a drop in base rates back down to 4% from their current level of 4.75%, by the end of 2005, in response. Whilst this report contains all of the rate-reduction factors that we thought might possibly turn up, that does not mean Money Surgery necessarily predicts these as well. Capital Economics bases much of its case on house prices falling, and it is worth bearing in mind that they have been wrong on this before. In 2002, it forecast that house prices would fall 25% in 2004 but in fact they rose 14%. Also, GfK Martin Hamblin reported a rise in consumer confidence in January, especially in relation to expensive household goods.

Their general predictions, however, make sense. They sound reasonable. We know that taxes are going up, house prices are stagnating, and personal debt is incredibly high.

If the Bank of England base rate dropped to 4%, the best Mini-cash ISA account with a variable rate would be paying 4.1 - 4.25%, which is a generous distance from Halifax's Fixed, Five-year 5.7%.

Inflation Balloons

(Tuesday 18th March 2003 news story)

The underlying rate of inflation has reached its highest level for almost five years. Figures from the Office for National Statistics (ONS) showed underlying inflation rose 0.3% during February to 3%. The increase , which was higher than City forecasts, means inflation has now been above the Government's 2.5% target for four months in a row. It was last higher in May 1998, when the figure reached 3.2%. Headline inflation, which includes mortgage interest payments, rose 0.3% to 3.2%, the strongest rate since September 2000.

The ONS said the inflation increase was largely due to the post-January sales recovery in prices being steeper this year than last, particularly in women's clothing. Prices for seasonal vegetables also rose in February, reflecting supply shortages. Higher petrol and housing prices have also had an upward impact on the inflation rate.

Living in a Bubble

(Wednesday 22nd January 2003 news story)

We are living in a credit bubble that is destined to be burst or at least puncture in the near future, according to the FSA. This morning, the Financial Services Authority, has warned that we are borrowing too much and saving too little. The FSA estimates that 10% of our spending is financed by debt, so we're living a long way beyond our means.

According to the FSA, low interest rates, low unemployment and booming house prices mean that, in the short term, we have easy access to credit and can service larger amounts of debt. However, the FSA is worried that lower economic growth, slowing or falling house prices, and the possibility of higher interest rates will leave many of us struggling to pay our way. The current rate of growth is rapid and unsustainable and, although credit arrears and defaults are low at present, the FSA expects them to rise.

The nitty-gritty of the FSA's report is based on facts and figures that are quite startling. The bubble that we are living in used to be like a bubble-gum bubble that was three or four inches wide on the face of our collective finances. We were used to that, here at Money Surgery but now, the bubble is from ear to ear. It is like the biggest bubble-gum bubble blown in any schoolyard in Britain. And it's threatening to burst all over our faces, our hair and our lives.
Check out the figures:

In the year to November 2002, residential mortgage borrowing rose by 13% to yet another record high of £663bn. That was £663bn! Consumer credit (including personal loans, overdrafts, credit and store cards) rose even more rapidly - by 15.4% - to hit an all-time high of £155bn. Gulp.

During the first nine months of 2002, the Council of Mortgage Lenders calculates that we borrowed £88.2bn for house buying, up 20% on the same period in 2001 and that was a hot period by any standards. We borrowed a further £30.5bn for re-mortgages and equity withdrawal, almost double 2001's figure of £16.9bn. So we are taking out the equity gained in our houses. If anything comes to upset the economic apple cart, we could go from housing boom babies, basking in the glow of unheard-of personal wealth to negative equity children, owing more on our homes than they are worth, in an environment where jobs are scarce, bills are mounting and times are hard, all in a matter of months.

It has happened before too: Many housing indicators are close to or already above the levels reached during the 1989-92 house-price crash. According to the FSA, areas of rapid, above-average house-price growth, including London, are most at risk. Mortgage repossessions and arrears are low but, disturbingly, our credit card arrears have been creeping up over the last three years because we prefer to default on our cards than put our homes at risk.

20% of us possess a credit card with an average balance of £2,203, with 15% having a personal loan, averaging £5,538. 15% of us have a car loan of around £4,439. The FSA calculates that 6.1m families and individuals are having problems meeting their debt repayments. Those in most difficulty were spending a staggering 31% of their incomes on repayments.

The FSA expects our ability to save in the future to be damaged by today's big mortgages and debts. As we reported below in Saving for Tomorrow, the Association of British Insurers suggests that the "savings gap" is £27bn. Then again, IFA Promotion has put this figure at close to £70bn!

Finally, the FSA is warning us that historically low inflation means that we need to adjust our expectations of returns from long-term saving and investment products. Some investors may be buying complex "high income" products without fully appreciating the extra risk that these plans involve.

Deflation Looms Large

(Saturday 9th November 2002 news story)

The dark spectre of deflation may be unfolding in Britain leading to unemployment from which it will be nearly impossible to escape. It could be said that privatisation, marketisation, liberalisation and globalisation are about to drag us all into an economic black hole. Japan has been fighting deflation for a decade, with massive public spending programmes and real interest rates around zero. It has only just about kept going. Germany is next in line and others may follow.

The term "deflation" has usually described deliberate government strategies to reduce inflation — reducing consumer demand by raising interest rates, raising taxes etc. Deflation is now more commonly used to describe a situation where consumer demand is collapsing, prices are depressed or falling, economic stagnation has taken hold and the whole process looks unstoppable. Businesses are so efficient that they over-produce to a dangerous level. Those with money stop spending because falling prices mean deferred purchases will be cheaper in future. This leads inevitably to rising unemployment, so workers too cut their spending. The economic vortex so created drags everyone down.

A recent report to the US government emphasised the danger of deflation and stated forcefully that deflation is much more difficult to counter than inflation. In Germany, the post-war "economic miracle" is going into reverse. Unemployment is over four million and rising, consumer demand is depressed and economic policy is now frozen in the glacial grip of the euro-zone. An intelligent German finance minister would at this stage want to reduce interest rates, depreciate the currency and increase public spending — all now impossible inside the euro-zone. The inflation targeting of the European Central Bank has promoted deflation. They've overdone it.

So far Britain has escaped the Japanese and German disease as it seems that the last flurry of buoyant consumption is taking place. Unemployment is half the level of the euro-zone, although manufacturing has been suffering. Rising house prices have sustained consumer confidence and the Bank of England’s inflation target is more a sensible symmetrical two and a half per cent. A symmetrical target is one where policy is designed to raise inflation if it falls below the target, as well as to reduce inflation if it rises above the target. A healthy growing economy always has some inflation in the system and two and a half per cent is definitely on the low side.

By comparison with the euro-zone and Japan, it seems therefore that Britain’s garden is rather rosy but this may not be true. First, a downturn in the rest of the world will have a knock-on effect in Britain. Secondly, the house price boom is petering out and consumers can be expected to reign in their spending in the coming months. Thirdly, price inflation in Britain has been below target for some months now — early signs of approaching deflation. It was reported in August that the Bank of England has discussed cutting interest rates "but held back for fear of panicking the markets". The stock market continues to slide and British bankers are warning that lights are "flashing red". Finally, there is the possibility of war and consequent increasing oil prices which will suck demand out of the western economies and bring recession.

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