The stalled UK economy in one chart

George Osborne might have avoided Triple Dip headlines last week when the UK registered 0.3% growth, but he and everyone else knows that the economy has stalled.

Critics like the IMF and Labour point to austerity as the cause and urge him to change tack.

Others wonder why the Bank of England's monetary shock and awe, including 4 years of 0.5% interest rates and £375 bn of QE, haven't done more to create a meaningful recovery.

So why is the economy stubbornly flatlining?  Although there are a ton of possible causes from the Eurozone crisis to high oil prices, I think my little chart explains a lot.

I have plotted 13 years' worth of UK household borrowings (basically mortgages plus credit card debts) to show how quickly they rose during the Brown boom, peaked in 2008 and have wobbled around the same level ever since.

Whether you blame the government, the banks or the borrowers themselves for the reckless excesses that preceded our current recession, it was a heck of a binge.  Every year up to 2008 the private sector was borrowing around £100bn net so no wonder the economy was growing.

And it's also no surprise that it had to come to a horrible end.  House price to income ratios just got too ludicrously stretched and the debts caught up with the weaker borrowers.  So after the Brown boom, the Brown bust.

It's a familiar tale but we have seen house price-related recessions before and they end.  I am sure most people were expecting things would pick up after a couple of years as the whole cycle started again, like it did in the mid-80s and again in the early '90s.   Why not this time?

Part of the answer lies in the sheer duration and scale of the boom.  My chart shows credit expanding from 2000 but the party had got started well before.  Look at this chart of house prices:

House prices took off in the mid-90s and had already risen mightily by the turn of the century.  If we had had a recession in the early 2000s, after the dot com boom ended, then things would have turned out differently.  However the Bank of England cut interest rates and kept house prices rising to avoid a recession but at the cost of an even bigger boom and bust to come.

So that is one part of the explanation - the UK is recovering from more than your ordinary cyclical house price boom and bust.  We are struggling to emerge from a 13 year phase of two booms without a bust in between.

The other reason why bust has stubbornly failed to give way to recovery is that, in a funny way, government and Bank of England policy has been too successful since 2009.  Brown and Osborne (I think of them pretty much as one person - see Oh No! Brown and Osborne have morphed into Geordon) have both thrown everything at efforts to prevent a deflation of house prices and an unwinding of the excess debt.

In the 80s and 90s there was the pain of unemployment, repossessions, bankruptcy etc before the scene was set for recovery.  This time there has been some pain but not on a scale to clear out the effects of the boom.  Both charts, house prices and borrowings, would have to show much sharper declines to reset the economy and make a recovery feasible.

To put it bluntly the UK could, and I would argue should, have chosen to mark a clean break with the Brown boom in 2009.  This would have had involved a deeper recession for sure but at least would have cleared away the excesses of the past and set the scene for future growth.

Instead, fiscal and monetary policy aimed at making the recession as shallow and painless as possible has left  Britain unable to recover.  All the old problems - an over reliance on debt to fuel growth, outsized and inadequately capitalised banks, overstetched households, unaffordable levels of public spending - are still with us.

This explains why government policy seems so perverse at times.  Things like the diabolical Funding for Lending Scheme ("The government scheme that's crucifying savers") are desperate attempts to get back to the £100bn a year borrowing days.  And also explains why these policies will fail - people can't afford to borrow more and finance house purchases at prices which are as high as in 2008 in many areas.

Think of my chart when you listen to Osborne, the Bank of England or the Opposition.  They all chose the "shallow recession" option and should not be too surprised now that recovery seems so unattainable.


From our website:  Spanish tax forms explained

Money to be made from the gold rush for the exit?

Shock horror for gold bugs: a two year low and the biggest two day decline in 30 years.

For the first time in more than a decade there is a genuine feeling that the gold price could collapse like it did in 1980 when the dollar price more than halved in a matter of months.

The equivalent today would leave gold south of $1,000 compared to its 2011 high of $1,920.  As of today, the price is hovering uneasily around the $1,375.

Plenty of people will have lost a packet but could now be the time to position yourself for a future profit?

Predicting the gold price short or long term is usually a thankless task.  How do you weigh up an asset class which offers no income and for which the real economy has little use for?

I would offer these observations, which suggest gold may not follow that 1980 trajectory below $1,000:

• The biggest source of demand for gold is Asian jewelry and Indian orders have apparently spiked upwards in immediate response to the recent falls;
• Despite all the talk of panic and rushing for the exits, most long term investors (as opposed to speculators) have stayed firm and there has clearly being some bargain hunting in the last couple of days;
• The main driver of the 1980 crash was a sharp increase in Fed interest rates.  And I mean sharp - up to 20%.  Such monetary tightening is not even the remotest prospect in the current climate;
• The 12 year bull run has been marked by substantial declines followed by steady recoveries.
• The underlying conditions that have supported the bull run - negative real interest rates and repeated but failed attempts to spark economic recovery by money printing - are firmly in place.
• Central bank buying reached a record high last year.  Once the dust settles Asian surplus countries wishing to diversify out of Western currencies will likely buy the dip.

 But these are just straws in the wind and you could probably make a list of bearish points easily enough.  And the short term is even more unpredictable with fear and volatility abounding. I won't be speculating on a gold comeback from these levels.

More interesting are gold mining shares which are unsurprisingly trading at multi-year lows.

Gold producers' profits suffer disproportionately from price falls as their costs do not fall in sympathy. Indeed runaway mining cost inflation, along with a hangover from over investment during the boom years, had already sent gold mining shares tumbling since before the latest crash.

FTSE constituent African Barrick Gold (ABG) has also disappointed the market by missing its stated production targets for three successive years.  In February ABG reported a. 70% profit decline even before the latest slide in the gold price.

But ABG has no debt and plenty of cash, some of which is due to be paid to shareholders in dividends shortly (it goes ex-div on May 1).  It has very large reserves compared to its much-diminished market value.  Its costs of production per ounce are about $975, sharply up over recent years but less than many in the industry.

A buy at today's £1.65 close (it was £4.50 at the start of the year)?

If you believe the gold price will recover at least partially then maybe.  However it had better recover quickly because otherwise ABG will be reporting losses and scrapping the dividend which will no doubt send its shares even lower.

From our website:  Spanish tax advice

The gym may be your best pension plan

Unsurprisingly there is a lot of pensions insecurity these days.

With economic prospects gloomy and government policy hell-bent on punishing savers, it seems only the really rich and those with a state-guaranteed pension can be confident about their retirement prospects (see Are public sector pensions really gold-plated?).

The odds are depressingly stacked against anybody trying to save for retirement.  There are at least four big hurdles:

1.      Ability to save

As real wages are actually falling that is a tall order for many people even with good jobs to save much at all.  Besides rising living costs, a lot of people these days also have mortgages set to last up to or beyond their retirement date.

2.       Generating investment returns

In the past pension projections used assumed rates of returns like 8% but they look highly unlikely from where we are now.    Take ten year gilts (British government debt) which currently yield 2%.  If inflation continues to run at 3-5% this implies a shrinking pension pot in real terms.

3.      Charges

Read the truth about fund management fees to find out about how layers of sometimes hidden charges can erode the value of your pension pot with devastating compound effects.

4.      Rock bottom annuity rates

These vary depending on a multitude of factors but typically will be around 5-6% without inflation protection or 3% with inflation protection.

From all this you can see how difficult it is to rescue a worrying pension situation in middle age.  Say you are 45, want to retire at 65 and have a pension forecast which falls £15,000 pa short of what you want.  You would need to build up a pot of £250,000 assuming an annuity rate of 6% is available when you cash in (at current rates that might just get you £15,000 pa but without inflation protection).

Assuming investment returns do no more than cover inflation and charges then you would need to save more than £1,000 a month out of post tax, post mortgage income.  Most people who can do this probably are not the ones worrying about their pensions!

What to do?  Certainly don’t put your head in the sand.  Try and maximise your pension contributions and take advantage of any employer-matching available.  Check  to see where the money is being invested and what charges are being taken out.  Twenty years is a long time so maybe inflation-beating returns and improved annuity rates will return at some point.

But another way to think about the problem is what sort of state will you be in when you reach retirement age, regardless of your finances?  

If you are mentally and physically fit and strong then, even if your pension plans have gone awry, you will be able to cope.  Most obviously you will be in better shape to carry on working and therefore earning and saving which is a double win for your eventual retirement as your pot increases and it buys a bigger pension.

You are more likely to feel like working a bit longer if you are in good health and more likely to be a desirable employee.  I know numerous people who work well beyond the classic 60-65 cut off and seem to get more out of the world of work than ever before, perhaps because they feel under less pressure or simply enjoy the continued routine or fellowship that work can offer.

If you are in good shape then you might be able to start a business, work part time (consultancy) or start a different career in a completely different sector (charity, public sector).  If you are feeling your age and in poor health then you are less likely to want to work any more and will not want to try something new.

My thinking is that if I invest time and effort in making sure I am fit and healthy well into my sixties and beyond then I will have options regardless of how my pension works out.

How to achieve this magical state of mental and physical wellbeing in later life?  I don't know but surely regular exercise and keeping the weight off have a big part to playing being "fit for purpose" if you need to work beyond retirement.  So invest in a gym membership as part of your retirement planning.

Spanish business expenses guide

The serious business of friendship

Friendship has been in the news.  An ONS report says people who value friendships are happier in old age.

This seems obvious when you think of the alternative - growing old without the company of good friends.  It doesn't sound appealing, hence the phrase "a lonely old age".

The benefits of having good friends are real and concrete.  I have heard friends described as "engines of happiness" and scientists claiming that friendships can prolong your life more than giving up smoking.

So if friendship is so important, do we take it seriously enough?  Most of us just take our friends (or lack of them) as a given and don't plan for or worry about them like we do things like work, property or pensions.

But arguably investing time and effort in your friends is likely to be much more important than the material stuff to your long term happiness.  What sort of things would you do if you wanted to be more business-like about reaping the benefits of friendship?  Here are three ideas:

Inventory.  If you going to actively manage your  friendships, you have to decide who they are.  Who do you want to be friends with?  It is surprisingly easy to waste time on people who you don't really like and alternatively neglect those you do.  It might see cold but make a mental list of who your close friends are but it is vital if you are going to put "invest" in the right relationships.

Investment.  However strong the original basis for a friendship, it will decline over time if neither party invests time and effort in maintaining and renewing the bond.  Again it sounds clinical but you might have to keep a note of when you last called or met your friends to make sure you don't neglect them.

Marketing.  Adding friends can obviously grow your "relationship capital", with the proviso that you don't want to spread your time among tenuous friendships. So maybe start a new activity where you can meet people or enjoy with existing friends. Many studies of human nature have named joining a group as the best single thing you can do to make yourself happier  as I discussed in How to be happy: 3 books, 1 answer.


From our website - Spanish tax advice from €35

Could Spain "do a Cyprus" and raid Spanish bank accounts?

Last year I posted "Are Spanish bank accounts safe?" but its assessment of the risks is now out of date because of the crisis in Cyprus.

Could Spain also start confiscating money from bank deposits in the country?

Will Spanish bank customers be effectively be blocked from accessing their accounts or moving money in  a crisis?

Is the €100,000 deposit guarantee offered on Spanish banks safe?  It didn't count for much in Spain where even tiny accounts were raided by the government and are now locked.

The Spanish government have point-blank denied there is the remotest chance of this happening in Spain and there is certainly no need to panic.

On an optimistic reading of current events you would say that Spain has already sorted out its bank recapitalisation and, even if a further bailout were needed, would learn from the Cyprus episode and not take a slice of its citizens' cash to do it.

However the crisis is a stark reminder of three worrying points for anyone with Spanish assets:

- the Eurozone crisis is still very much unresolved and will keep coming back in nasty and unpredictable ways
- the real powers that be, such as the IMF and Germany, carry all the clout and will happily trample all over Spanish national interests when there is a risk to their money
- governments are getting desperate and no liberty is too sacred to be trampled on.

I never thought I would see a European country locking its people away from their own money, but its part of pattern of governments getting increasingly aggressive and intrusive in attempts to raise cash.  In Spain we have already seen the forced declaration of foreign assets which surely is the forerunner of more punitive taxes on them.

However some of the recent reports of Spain already planning a raid on deposits is alarmist (example - Cyprus copycats: NZ and Spain).  They refer to the "moderado" levy which is being introduced at 0% (!) initially but will rise to something like 0.1-0.2%.  The key point though is that this is a pre-announced tax on the banks themselves and not a preemptive raid on deposits of their customers.

Call me naive but I don't think the "moderado" and the Cyprus levy are comparable and there is little likelihood of it mutating into a serious government bank account attack.  Not to say that the government will not get their hands on their people's cash in other ways of course - ever higher taxes on spending and income or a big increase in the wealth tax that was brought back recently.

All in all though I would say it is unlikely that the Spanish government will "do a Cyprus".  Most likely nothing will happen so long as the government debt crisis doesn't start flashing red again.  If that happens, and I think it probably will because the Spanish economy can't survive the measures announced last year to cut the deficit, then all bets are off and the fears I spoke about in my original article may be realised.

From our website:  Autonomo Guide

EU withdrawal is losing its appeal

I have been a Eurosceptic for decades so it might seem strange, with an in-out referendum promised and anti-EU sentiment at an all time high, I am cooling on the idea of a UK exit.

Don't get me wrong, I have not suddenly learned to love Brussels.

Just last week, the British government was overruled on bankers' bonuses.  Regardless of what you think about our friends in the City, the effects of this move will overwhelmingly be felt in Britain and yet we have no right to say no.

The Eurozone shambles has reduced pro-European voices to a whisper and not just in Britain.  Any notions of being better off "at the heart of Europe" are now widely derided as those who warned about the single currency are  completely vindicated (Euro doubters are being proved doubly right).

Consequently the Europhiles have adopted fear tactics.  Fear of lost trade, jobs and inward investment.  Fear of declining influence and isolation. Fear of retribution from Brussels, Berlin and Paris.

I would liken the situation now to a spousal abuse victim finally plucking up courage to leave her husband.

Britain has been marginalised, overruled and bullied by the EU for a long time but only now, when the resolve to do something about it has hardened, do the doubts creep in...

She thinks: "What will I do for money?", We think: "who will we trade with?"

She worries: "What if he comes after me?". We fear regulatory retaliation.

She worries:"What will our friends say?".  Will Obama still take the PM's calls?

The temptation is to dismiss the Europhile fear-mongering and marginalise the downside of leaving the EU.  That would be a mistake because some of the issues are genuine and could easily turn a referendum in favour of remaining in the EU.

It is obviously true that leaving the EU will have downsides. Yes we will lose a measure of influence in the world and particularly in trade negotiations.  Of course our spurned partners (especially France) may try and put the knife in and, for example, stack the regulatory cards against the City of London.  Multinationals will certainly be worried about the security of access to the giant, albeit, shrinking market across the Channel.

None of this means that the UK should just lump it in the EU, like the victim who keeps giving their abuser another chance.  And that old reform-it-from-within line is starting to sound pretty lame.  The Eurozone countries have their own existential struggle going on and are not going to listen  to Britain however polite and obedient we are.

Besides some of the fears can be dealt with by securing guarantees in exit negotiations which could take years and in which we hold some cards, a big trade deficit prime among them.

However to make a case for withdrawal, EU opponents must do more than try and talk away the negatives. They must present a positive case for being a free and independent country once again.  How would we use that room for manoeuvre?

Theoretically the UK could reap massive economic and social advantage from being fully sovereign again: a more rational immigration policy, a massive reduction in red tape and converting saved budget contributions into tax cuts aimed at growth.

But there is a big difference between being offered an opportunity and taking it.  Given that the two main British parties are both firmly wedded to the high spending, high taxing, bank bashing, welfarist, interventionist consensus that currently prevails, EU withdrawal would be unlikely to usher in a new era of economic liberal radicalism.

And without hope of turning into the Hong Kong of Europe, why take the risk of leaving?

The best quote I ever read about withdrawal was from a Europhile who said "Britain has a competitiveness problem not a Europe problem".   Germany out-exports us handily under exactly the same regime of EU regulation.

Much as you might loathe the EU, without serious commitment to reform Britain is in deep trouble whether it leaves or not.


From our website:   Spanish non resident tax

Is Corte Ingles really the Spanish Disneyland?

I have never rated the Spanish retail sector with its poor service, over-priced and uninspiring product lines and old-fashioned stores.  But apparently they are the next big tourist attraction.

According to this article - Spain's retailers reboot to pull tourists from shore to store - a big effort is underway by the likes of Mango, Corte Ingles and others to offset falling local sales by attracting more foreign tourists with translators, discounts and targeted advertising.

I find it unlikely that tourists will take the bait.  I certainly don't recognise the description of El Corte Ingles quoted in the article: "it's like a Disney theme park for us ... we spend a whole day in here".

The shopper said that he was Colombian, which makes me think if I ever visit Colombia not to expect too much of their department stores.

I can't think many British visitors would be so impressed with El Corte Ingles.  It's not awful by any means but seems expensive to me and will feel even more so to tourists getting little more than €1 for their pound.

And Spanish shops seem to rarely offer great discounts, especially the supermarkets which I see as a couple of decades behind the British ones that everyone moans about so much.

I have already had a go at Spain's bargain stores (Spanish pound shops need to raise their game).

Perhaps clothes shops might get some joy.  Spanish fashion chains such as Mango and Zara enjoy strong international reputations and might attract some more business with a concerted push.  At certain times of the year their sales can feature meaningful cuts in prices too.

Beyond that I don't see Spain's shops becoming its next tourist attraction.  To get a sorely needed boost to demand from more tourism the country would be better sprucing up tired looking tourist infrastructure, improving the beaches and prioritising good service (see Spanish tourism feels the heat).


From our website: Employing staff in Spain