No Interest Rate Rise, For Now
The UK economy grew by 0.5% in the last quarter of 2015 and the Bank of England Governor, Mark Carney, announced that there was “no need for rate rises for now.” Chancellor of the Exchequer, George Osborne, warned of a “cocktail of risks” facing the UK economy – tension in the Middle East, slow global growth and the possibility of an interest rate rise. The FTSE 100 index of leading shares fell in January, but only by 3%. It started 2016 at 6,242 and closed January at 6,084.
Good News, Bad News
Recent reports show that 2015 was a record year for new car sales - 2.63m vehicles were registered, an increase of 6% on 2014 and the fourth consecutive year of growth. Amazon announced that it would create 2,500 jobs in its fulfilment centres to support the continued growth in online sales and BT announced 1,000 new jobs in UK call centres. Tesco reported a “strong Christmas” with sales up 1.3% in the period. However, Tesco had another negative internal management issue exposed as they admitted “deliberately delaying payments to suppliers to improve its own financial position.” Similarly, RBS were forced to set aside another £2bn to cover PPI mis-selling and bad loans in the USA. Figures released in January showed that UK manufacturing slowed again in December. BP announced plans to cut 4,000 jobs as the oil price continued to slide, and Tata Steel closed its Port Talbot steelworks with the loss of another 1,000 jobs. Shoe retailer Brantano went into receivership with the potential loss of 2,000 jobs.
Rain, More Rain and Flooding
Approximately 5 million properties in England are at risk of flooding and the government has estimated that the annual cost of damage to properties from flooding in England and Wales could rise from £1.2 billion in 2012 to between £2.1 billion and £12 billion in 70 years’ time (if action isn’t taken to improve protection).
Many of the homes flooded recently have suffered similar problems previously, so there has been a renewed debate about the need to reinforce flood defences. Annual spending on flood defences in England by the Department for Environment, Food and Rural Affairs (DEFRA) had been growing in real terms up to 2010-11. But it declined by almost 15% in 2011-12, and since then it has remained at broadly the same level in real terms, despite promises from politicians.
There is some positive news - the launch in April of a new flood insurance scheme, “Flood Re”. The intention is to ensure that domestic property insurance is available and affordable for homes at risk of flooding, without placing excessive costs on other policyholders or taxpayers.The scheme works by allowing the insurer to give up the flood risk part of a policy covering a home with a history of flooding and use Flood Re instead to cover it. Flood Re is a “flood re-insurance vehicle”, which will be funded by a levy on all insurers according to their market share. This levy has been set at £180 million per annum for the first five years – equivalent to around £10.50 for every household in the UK with both buildings and contents insurance. It has been estimated that, over time, some 350,000 homes may benefit as a result. For more information visit the Flood Re website.
World Economic Highlights & Lowlights
Good news for the UK car industry to start the month, but in Germany the problems for Volkswagen continue as the US Justice Department decided to sue the car manufacturer over the emissions scandal. VW sales fell for the first time in 11 years - sales dropped by 4.8% in 2015 to 5.82m cars, down from 6.12m in the previous year. In contrast, overall car sales in Europe were up by 9.2% in the year.
Unsurprisingly, the countries recently impacted by terrorism are seeing a drop in tourism, and French President Francois Hollande declared that France was in a state of ‘“economic emergency.” France launched a €2bn job creation plan to try and combat their high unemployment rate – 10.6% against a European average of 9.8% and a German rate of 4.2%.
Good news - Airbus signed a $25bn deal with Iran – one of the biggest since Western sanction against the country were lifted. The Eurozone inflation rose - up to 0.4%, slightly putting off fears of a continuing slowdown. European Central Bank chief, Mario Draghi, backed this up by hinting at further stimulus moves, saying there would be “no limits” to action to improve the European economy.
In the European stock markets, the German DAX index fell 9% in the month to close at 9,798: the French stock market was down by 6% to 4,417.
January saw a mix of good and bad news from the United States. Jobs growth remained solid in December as 292,000 were added, which was ahead of expectations. However figures released for the fourth quarter of 2015 indicate that the pace of US growth was slowing.
Walmart announced that it was to close 269 stores, stating that it was struggling to compete with online retailers such as Amazon - sales at Amazon rose 21.8% in Q4, allowing the company to post record profits. Despite this, Amazon’s results were below expectations and the shares fell when the figures were announced.
Facebook’s Q4 profits more than doubled to $1.56bn – but Apple warned that sales of the iPhone were likely to fall this year for the first time since the product was launched in 2007 - possibly due to market saturation.
The Dow Jones index fell 6% in the month, starting the year at 17,425 and closing January at 16,466.
The financial world continues to worry about the slowdown in the Chinese economy, where manufacturing fell in January for the sixth month in a row. The economy continues to expand but the rate is much slower than in previous years, which has meant a consequent drop in demand for oil and natural resources.
Share price movements have been erratic, trading was suspended on several occasions and at the end of the month the Shanghai Composite index had fallen 23% to 2,738 from an opening level of 3,539.
However, China is still producing a trade surplus every month. In December this was just over $60bn – ahead of market expectations and well up on the $49bn of a year earlier. This surplus is increasingly being invested overseas, with January seeing major purchases in Germany and in the US.
The recent falls on the Chinese stock market were not repeated on the other major Far Eastern markets. The Japanese Nikkei Dow index was down 8% to 17,518 as the Bank of Japan tried to boost the economy by moving to a negative interest rate, whilst Hong Kong was down 10% to 19,683. The South Korean stock market reported a modest drop of 2% to 1,912.
The Russian market gained 1% in January, to close the month at 1,785. This was despite some fairly catastrophic figures released by the official statistics service, showing that the Russian economy had contracted by 3.7% in 2015, with sales down by 10% and capital investment down by 8.4% in the worst performance since 2009.
The Indian stock market was down 5% to 24,871 and the Brazilian index continued its slide of last year, falling another 7% to 40,406. There was more bad news in South America as the Venezuelan government declared a state of economic emergency, with figures suggesting that the economy had contracted by 4.5% in the first nine months of 2015.