July 15 – Onward and Upwards

BY IN Article On 3rd August 2015

The UK economy continues to look positive following George Osborne’s second budget of 2015.  Economic growth is predicted to continue in the positive, within a range of 2.5% to 3.0% per annum for the near term.

This is a strong positon given conditions in other developed nations and the built in uncertainty of both a potential Greek euro exit and a UK referendum on EU exit.  The economic fundamentals are robust with strong export growth continuing and both employment rising and unemployment falling.  Retail inflation remains under control, with the uncertainties in world markets, including the big falls in the Chinese stock market weighing heavily on the influence to keep UK base rates on hold.  It is clear that broader funding rates remain more volatile, but swap rates and LIBOR are proving very resilient near their current historic lows.

One area of concern covered by the Chancellor in the Budget was the income balance component of the current account, which has declined since early 2012.  This reflects lower income received from investment abroad.  Weaker euro area growth and global prospects have seen UK investments abroad yield lower returns while, in contrast, as the UK economy has continued to recover, the payments made on foreign investments in the UK have increased.

The UK’s large current account deficit contributes to the UK running the largest combined government and current account deficits in the G7.  A current account deficit means the UK is a net foreign borrower and is acquiring more foreign liabilities than assets.  The UK has run a persistent current account deficit for 30 years and a small deficit is sustainable with continued capital inflows.  The UK’s budget deficit and debt position is in part financed by these capital inflows through purchases of UK government gilts.  In comparison, countries that have higher levels of public debt but run small current account surpluses, such as Italy and Japan, are less exposed to financing risks from a shift in overseas investor sentiment. The government’s fiscal plan to complete the repair of the public finances should support a gradual narrowing of the current account deficit and reduce this exposure.  However we are very dependent on continuing low interest rates and being able to service the costs of this debt.

The one area that has been causing the Financial Policy Committee concern over its last two meetings has been the perceived growth in the Buy-to-Let (BTL) market.  Concerns have been expressed on the increased availability of loans at or above 80% LTV and whether some consumers are using such loans to get around the new residential mortgage affordability rules.  The Committee will continue to monitor this closely.  Should they decide that BTL lending is contributing significantly to house price inflation we should expect to see caps on lending introduced, so limiting lenders capacity in the market.  The decision by the Chancellor to gradually reduce the tax relief on mortgage interest on BTL properties to the basic rate of income tax from 2017 is likely to produce some slowing in the medium term. Alternatively, it might just push up rents even further.

Finally, I cannot leave this article without expressing serious concern over the latest FCA fees consultation.  All of the valid points put forward by over 70 organisations were ignored by the regulator.  In dismissing all of the points raised and continuing with the significant increases in fees, I am concerned that the senior levels of the FCA are out of touch with industry sentiment.  My member firms would not be paying a performance bonus to a Chief Executive who presided over spending £3.2m on unrequired software licences.

At least we know that our Regulator won’t be going bust in the foreseeable future since as when analysing their Going Concern considerations “the FCA’s strong fee covenants are underpinned by the statutory powers granted to it to raise fees to fund its and the PSR’s regulatory activities.” Or to put that into simple English they can continue to escalate their fees as much as is needed to support their lifestyles.


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