WISE MONEY

The UK’s goods trade deficit widened to a record high in July after imports rose sharply and exports fell from the previous month, figures show.
The total trade deficit – which includes services – widened to its highest in almost five years.

The deficit on goods and services rose to £4.9bn, against £3.9bn in June, the Office for National Statistics said.

The goods deficit was £8.7bn, against £7.5bn a month earlier, the biggest deficit since figures began in 1998.

However, trade in services produced a surplus of £3.8bn.

Analysts are watching to see if the new figures will have an impact on third quarter UK GDP.

July’s dreadful UK trade figures cast further doubt over the ability of the external sector to drive the recovery once the boost from government and consumer spending fades.

Imports increased by 3.1% on the month in value terms, which was largely driven by an increase in imports of organic chemicals, pharmaceuticals and oil. Exports including chemicals and oil fell by 0.9%.

The newest member of the Bank of England’s interest rate setting Monetary Policy Committee hit the headlines this morning.Britain faces “significant” risk of a fresh slump into recession according to Dr Martin Weale, who said it would be “foolish” to rule out the possibility of a double-dip downturn. He also thought the Banks central outlook on growth could be too optimistic in light of the fiscal cuts currently being implemented.

The BoE forecast is for growth of about 2.8% in 2011 and 3.2% in 2012. Sterling has dropped over a cent against the dollar following the news and has traded as low as 1.5371.

M&A activity in the US, helped lift sentiment yesterday, unfortunately this did not last for long and both main stock indexes closed marginally down on the day.

There is little economic news again today so focus is likely to remain on the existing home sales in the US which is out this afternoon at 15:00. Figures are expected to show that sales of existing US homes fell to an annual rate of 4.67million in July from 5.37 million in June.

The Governor of the Bank of England Mervyn King presented a very down beat assessment of the UK’s growth prospects this week.For the first time he mentioned there was an outside chance of a double dip recession during his inflationary report.

This sent the FTSE down 2.4% to 5245.21 and the pound fell for a third straight day against the Dollar down to a low of 1.5626 giving back all of last week’s gains.

In his Quarterly Inflation Report King highlighted that they are nowhere near considering an exit strategy, nowhere close to increasing interest rates and have now left the option open for renewed quantitative easing should the need arise.

This negative sentiment overshadowed the positive UK unemployment data which fell as the economy added workers at the fastest pace since 1989.

Unemployment as measured by the International Labour Organization fell 49,000 to 2.46 million in the three months up to and inclusive of June.

Employment jumped 184,000 to 29 million. Overnight sterling has shown relative strength versus the euro, moving over 1.5% against the single European currency and hit a high of 1.2182.

On Friday, US Employment fell for a second straight month in July as more temporary census jobs ended, as private hiring rose less than expected, pointing to an stunted economic recovery and a potential requirement for further quantitative easing. The main points were as follows: Non-farm payrolls fell 131,000 the Labor Department said on Friday, as temporary jobs to conduct the decennial census dropped by 143,000. Private employment, considered a better gauge of labor market health, rose 71,000 after increasing 31,000 in June.

The government revised payrolls for May and June to show 97,000 fewer jobs than previously reported. Analysts polled by Reuters had forecast overall employment falling 65,000 and private-sector hiring increasing 90,000.

The unemployment rate was unchanged at 9.5 percent in July for a second straight month, just below market expectations for a rise to 9.6 percent.

It was a similar sentiment in the UK as both consumer and business confidence dipped again.

The most recent purchasing managers’ index from the services sector indicates that, while growth continues business expectations have suffered a fall of about 10% since Spring. Friday’s PMI data showed a rise in cost of 5% which is rather high and pulls inflationary pressures into focus.

The other area of alarm for most is the idea that whilst interest rates remain low and are expected to stay as such until 2011 there seems to be greater comment around the fact that when they start to move they are likely to move quickly.

It is still a very fine balance to control inflation, implement spending cuts and tax hikes whilst in the meantime not cause a double dip.

The general market view seems to be that interest rate rises back towards more ‘normal’ levels can only be implemented if the economy grows confidently the idea of pushing an already fragile economy back into recession is simply not palatable.

The Bank of England has kept its economic stimulus programme and record low interest rate of 0.5pc in place yesterday amid lingering doubts among rate setters over a sustained recovery for the fragile UK economy.The nine strong Monetary Policy Committee (MPC) was not swayed by the UK economy’s rapid 1.1pc advance between April and June, with growth expected to fade in the second half of 2010 as the biggest Budget cuts since the Second World War take hold.

Mervyn King, the Governor of the Bank of England, has repeatedly emphasised that there is no guarantee that the recovery which began in the fourth quarter of 2009 is sustainable.

The MPC held rates at the historic low of 0.5pc – where they have been since March 2009 –and maintained its target for bond holdings at £200bn, when it announced its monthly decision at noon.

The MPC maintained the ultra loose policy stance it established when the crisis took hold, despite a return to economic growth and a persistent failure to meet its 2pc inflation target.

The consumer prices index – the official measure of inflation – has been above 3pc since the beginning of the year. The Bank is expected to raise its inflation forecasts when it publishes the August Inflation Report next week, to reflect above-target inflation for most of 2011.

Mr King has stated that a failure of banks to lend, as well as weakness in Britain’s key export markets, could hamper growth in the UK.

Fears that Britain’s recovery will slow were reinforced by a snapshot of the UK services sector in July on Wednesday.

Economists had expected a slight improvement to 54.5, and the disappointing news for the economy helped to drive sterling pound down almost a cent lower against the dollar, to close at $1.5877.

Money markets around the world fell this morning as investors worried about the lack of global growth resurfaced in Asia.
London’s FTSE benchmark index of top companies was down 1.08pc at 4,911.56 points in early trading, Frankfurt’s DAX 30 slid 0.6pc and Paris’ CAC 40 sank 1pc.

Sterling slipped to $1.51 as the fall in shares took the steam out of the Pound’s corrective rally against the dollar.

Data showing a slide in UK job growth in June helped the Pound lower as it highlighted the fragility of the employment sector, which is likely to face more pressure when drastic public spending cuts take effect.

The UK Recruitment and Employment Confederation said its permanent placements index fell to a five-month low of 60.7 in June from 61.3 in May.

Asian markets retreated as investors lost their appetite for stocks after a disappointing US services sector report pointed to an anemic recovery in the world’s largest economy.

Despite a short-lived rebound in global markets on Tuesday as bargain-hunters piled in, traders remained unable to shake deepening unease about the global economy.

Japan’s Nikkei 225 fell 0.6pc as a strong yen kept pressure on exporter shares. A strong yen reduces the value of their overseas profits and makes Japanese products more expensive abroad.

Elsewhere, Hong Kong’s Hang Seng index lost 1.1pc and Seoul’s Kospi was down 0.5pc. China’s Shanghai Composite edged higher.

Today sees the start of a new age of austerity as the Government announces £6.2 billion of immediate spending reductions, paving the way for much deeper cuts in the future.

The Liberal-Conservative coalition is hoping that these initial cuts will prepare the population for severe fiscal measures next year with reports of up to 300,000 public sector redundancies.

Despite these unpopular decisions, markets have been indicating that they want these measures in place if Sterling is to recover against the majors in the long term.

Over to the European mainland and the Euro recovered somewhat on Friday, reaching a one week high against the Greenback as buyers returned to the Euro and halted the currency’s decline. This welcome support came on the news that EU officials pledged to tighten sanctions on high-deficit member countries and said that no European country will be allowed to renege on its debts.

In the early session this morning, the Euro has given back some of these gains with traders reported to be selling into the bounce on ongoing concerns about the outlook for the Eurozone.

To add the Euro’s problems, concerns that the EU credit crisis is spreading with the announcement that the Bank of Spain is to take over the running of one of the country’s saving’s banks.

This pushed the Euro lower against the Dollar and Sterling from highs of $1.2510 and $0.8635 respectively. However the Euro remains well off last week’s four year low of $1.2146, as markets awaits further developments in terms of the sovereign risk issue.

The Conservatives and Liberal Democrats have formed the first coalition Government since the Second World War.

After negotations last night that went to midnight, here’s an initial take on what’s been agreed:

ECONOMY
- A significantly accelerated reduction in the structural budget deficit over the course of a parliament, the main burden to be borne by reduced spending rather than increased taxes
- Six billion pounds in cuts to non-frontline services this financial year subject to advice from the Treasury and Bank of England
- Partially reverse Labour’s planned increase in payroll tax
- Create independent Office for Budget Responsibility

Nick Clegg becomes deputy prime minister. Some junior ministerial posts will also go to Lib Dems.

TAX
- The Conservatives agreed to scrap their commitment to raise the death tax threshold to £1 million over the next parliament.
- Instead the two parties have agreed to adopt the Lib Dem policy of raising the personal tax allowance to £10,000 as a long-term goal, with a promise to take “real terms steps each year towards this objective”.
- The parties did not agree to a Lib Dem call for a “mansion tax” on high-value properties or to stop tax relief for higher rate pensioners.
-The parties agreed to a substantial increase in the personal income tax allowance from April 2011, with the benefits focused on the lower and middle classes.
- This will be funded by dropping plans to increase the employee threshold for the national insurance payroll tax and by raising capital gains tax for non-business assets so it is closer to the level of income tax.

Sky News is reporting that Vince Cable will be put in charge of policy for banks and businesses. This is the same man who in the Chancellor’s debate said that the Tories were just waiting to “get their noses in the trough and reward their rich backers.”

The political change should remove a substantial part of the uncertainty that has been weighing on Sterling of late.

Evidence of further recovery in the UK labour market today as well as market speculation about changes in the monetary policy outlook following the release of the Bank of England’s Quarterly Inflation Report should be supportive for the Pound.

The Liberal Democrats are holding the country to ransom while an unelected leader of the Labour Party remains Prime Minister.

It is a measure of Gordon Brown’s loose grip on reality that he sought to depict his decision to stand down later this year as a noble act of self-sacrifice made in the national interest. The truth is that this was an act of quite staggering cynicism based on naked party advantage.

With the incomprehensible connivance of Nick Clegg – whose reputation will surely never recover – Mr Brown is effectively seeking to nullify the result of last week’s general election. Blinded by his tribal loathing of the Conservatives, he is ready to risk everything – and the Daily Telegraph used that term advisedly – to keep David Cameron out of Downing Street.

This unelected leader of the Labour Party will remain Prime Minister, even though his party secured two million fewer votes and 48 fewer seats than the Tories.

He will then hand over at a time of his choosing to a new Labour leader. At that point, the United Kingdom will find itself governed by a Labour prime minister the country has not elected, succeeding a Labour prime minister neither the country nor his party elected. Even by Labour’s standards, this is self-serving and unscrupulous.

Mr Brown talked yesterday about the importance of a strong and stable government at a time of grave economic crisis. Yet he is seeking to concoct with the Liberal Democrats a governing coalition that will be inherently unstable and weak. A Lib-Lab pact cannot deliver a majority in the new House of Commons.

It will be reliant on the smaller parties – the Scottish and Welsh Nationalists, perhaps the DUP – to secure its business. What will that mean? That the English taxpayer will be expected to keep those parts of the UK in the heavily-subsidised style to which they have become accustomed.

This at a time of economic distress when deep cuts in the public services in England are inevitable. Just as pertinent, England voted decisively for the Tories last Thursday (297 seats to Labour’s 191), yet is to be effectively disenfranchised by the Brown/Clegg stitch-up.

Does Mr Brown realise how dangerous a game he is playing? He has made much over the past couple of years of his devotion to the Union, yet his political scheming will place it under immense strain.

And how exactly is a Labour leadership contest supposed to encourage stability? Campaigns were already gearing up last night. The notion that the challengers to succeed Mr Brown will be devoting their full energy to their ministerial jobs in the weeks and months ahead is, frankly, laughable.

The markets responded to Mr Brown’s pieties about stable government by plummeting. They assessed very quickly just how ramshackle such a cobbled-together coalition will be.

The prospect of swift and decisive action to tackle the deficit evaporated at precisely one minute to five yesterday, when Mr Brown made his surprise statement in Downing Street.

Why is this happening at all? This brings us to Mr Clegg and the Liberal Democrats. They are, in effect, holding the country to ransom in pursuit of a new voting system. An issue that featured nowhere on the list of voter priorities in the general election now dominates the political debate.

And the tail is wagging the dog. Last Thursday, the two parties that were formally opposed to PR, the Tories and Labour, between them polled 19 million votes. The party that supports PR polled fewer than seven million votes. Is this what Mr Clegg means when he talks about the “new politics”? And what is “new” about a deal brokered by three unelected Labour figures – Lying lords Mandelson and Adonis and Alastair Campbell?

Since last Friday we have lived with the fiction that Mr Brown was simply doing his constitutional duty by staying at the helm until a new government could be formed, acting in the national interest.

Now we see that all the time he has been acting in his and his party’s interest, defying the verdict of the electorate by trying to create a coalition of the election losers. This is a bleak day for our democracy.

It appears there is no more effective a way for a small country to get its own back on a larger one for it’s antisocial behaviour than to have an erupting volcano spew it’s lava towards the bully.

No trade embargo, however effective, could compete with the economic devastation that Iceland’s Eyjafjallajökull volcano threatens to visit on Britain and much of Northern Europe.

How costly it ultimately proves depends, on the prevailing winds and the length of the eruption, but any prolonged shut down of UK airspace would certainly have profoundly disruptive economic consequences.

Britain is one of the most open economies in the world. As such it depends vitally on getting people, goods and food in and out of the country.

The only remotely comparable event in recent times is the shut down in US airspace that occurred immediately following 9/11.

It is impossible to disentangle the immediate costs for the airlines of the 2001 terrorist atrocities from their longer term consequences, but ultimately the US government had to provide the industry with a package of federal aid to keep it afloat, including $10bn of loan guarantees and $5bn of short term assistance.

Lost economic activity ran to hundreds of billions of dollars.

Britain’s still unresolved dispute with Iceland over the costs of bailing out UK depositors in the collapsed Icesave might give reason to believe, if you were living at the time of the great Nordic sagas, that the eruption is some kind of divine act of revenge.

The compensation demanded of Iceland amounts to thousands of euros per head of population and will take years to pay off.

In the view of most Icelanders and most international observers, Britain has behaved in a most ungentlemanly manner by it’s prime minister using anti terrorism legistlation to freeze billions of Pounds worth of depositors’ money.

If Iceland’s Eyjafjallajökull volcano continues to erupt for a similar length of time as it’s last eruption- 2 years, and the UK continues to endure artic weather of a similar BBQ forecast summer as last year the financial effect on the UK will be enormous.