Foreign banks held to same strict standards as U.S under financial reforms
Plans to impose the same strict banking regulations on British banks operating in America as domestic banks have been approved by the U.S Federal Reserve. Under the Obama administration, U.S financial administration and regulations have been reformed and a part of this reformation is the new rule requiring foreign banks to hold extra funds in America instead of their home country.
Banks will also have to establish a U.S intermediate holding company which will then be required to comply with the same capital requirements as American banks. Major British banks such as Barclays, Royal Bank of Scotland, HSBC and Standard Chartered could all be affected by the change.
These changes will effectively “ring-fence” capital and liquidity in the U.S, meaning that non-US banks will no longer be able to take advantage of Federal Reserve emergency loans as happened during the 2008 financial crisis. There has been some concern over the new rules harming the global economy by risking global instability, voiced predominantly by the Global Financial Markets Association which represents national and global financial institutions around the world.
The Federal Reserve holds a “long-standing policy of national treatment and equality of competitive opportunity between the US operations of foreign banking organisations and US banking firms”. Janet Yellen, Federal Reserve Chair, said that these new rules would enforce consistent standards for all banks operating in the country.
To make the transition slightly easier for foreign banks, some rules have been relaxed, for example the threshold for requiring a US intermediate holding company is increased from $10 billion to $50 billion of US non-branch assets. Compliance with the new rule must be complete by July 1, 2016 for foreign banks, a 12 month extension from the initial proposed date. American bank holding companies must comply by January 1, 2015.
U.S Federal Reserve taper affects Asian markets
The U.S Federal Reserve’s monthly bond purchases have been reduced by $10bn for the second time this year. This brings the economic stimulus down to $65bn from the initial $85bn. The overnight interest rate has not changed since 2008 and remains at 0%.
Federal Reserve policies are gradually returning to normal after delays over the taper were decided in order to protect the vulnerable global economy. If it continues at this rate the process of quantitative easing won’t be complete until June or July 2014 but even this slow movement has caused big problems in emerging economies.
A result of the Federal Reserve’s tapering is that it increases global interest rates, leading investors away from emerging economies which previously offered higher returns, and back towards U.S markets. This is good for America but detrimental to the already struggling emerging economies as moving money to the U.S involves selling the currency, consequently decreasing its value.
The Federal Reserve supported its decision to continue tapering its bong buying programme, stating that there had been “improvement in economic activity and labour market conditions… consistent with growing underlying strength in the broader economy”. Whether a further reduction of $10bn is approved in March depends on the global reaction to the economic taper and the impact it has on emerging economies.
So far much of this has been absorbed by Asian markets and significant losses have been suffered as the Federal Reserve continues cutting back its bond buying for a second consecutive month. India, Argentina, South Africa and Turkey have abruptly increased their interest rates in attempts to boost inward investment but these emerging markets and their currencies remain vulnerable.
Japan’s Nikkei 225 index has fallen 3%, Hong Kong’s Hang Seng by 1.4%, and Australian stocks by 1% as investors turn to higher rated assets such as gold and sovereign bonds.
The tapering is positive for the U.S as it reflects the country’s progression in terms of economic growth and reduced unemployment. However, the effect on the rest of the world is less than advantageous and some sensitivity must be shown to protect the global economy as a whole.
Bilateral trade between China and UK stronger than ever
Chinese ambassador to the UK, Liu Xiaoming has announced that bi-lateral trade between China and the UK exceeded $70bn (£43bn) last year, the strongest in history.
The UK is miles ahead of any other EU country in terms of Chinese investment, having more than twice the investment of its European neighbours, and also features in the top ten countries receiving the highest number of Chinese exports.
Trade links between the UK and China have been cultivated in recent years. China is the second-largest economy in the world and the UK is eager to gain access to its huge domestic market.
Prime Minister David Cameron visited the country last year and said that “The UK can be the most profitable destination in the Western world for Chinese outward investment in infrastructure, real estate, energy and transportation”
An independent business network called The 48 Group Club is working on developing the bilateral business relationship between the two countries. Chairman Stephen Perry said that “China and the UK working together will benefit our people and contribute to global peace and development.”
To Chinese companies the UK is an advantageous location for European expansion, due to its geographical location and facilitative EU trade. The Dalian Wanda Group plans to spend £1bn in the UK, buying a British yacht maker and developing hotel property in London. Huawei, a network equipment maker, plans to expand its UK operations with an investment of £1.3bn.
In the north of the country, Beijing Construction Engineering Group (BCEG) along with a group of other corporations will be investing £800m in Manchester Airport in order to build up the surrounding business in the area.
The size and economic strength of China makes it a formidable business partner and the trade link between China and the UK could not only be beneficial for them, but also in the EU and global markets as a whole.
EU suspends U.S investment talks
Last year negotiations over a new cross Atlantic free trade deal began between the EU and U.S. Entitled the EU-US Transatlantic Trade and Investment Partnership (TTIP), both countries hope that the deal will expedite bilateral trade and increase profit. Estimated initial figures from an EU study on the potential effects of the trade deal indicate that the EU economy could be boosted by €120bn or 0.5% of GDP, and the U.S economy by €95bn or 0.4% of GDP.
However, the proposed investment rules have created some friction in negotiations and the European Commission has temporarily suspended talks on this subject. Several non-governmental organisations (NGOs) have been vocal with their concern about these rules, particularly with regard to how they could prevent government action in contest with giant U.S corporations, and the acceptance of lower U.S standards over European social protections.
EU Trade Commissioner Karel De Gucht said “governments must always be free to regulate so they can protect people and the environment. But they must also find the right balance and treat investors fairly, so they can attract investment… Some existing arrangements have caused problems in practice, allowing companies to exploit loopholes where the legal text has been vague.”
The “Investor-State Dispute Settlement (ISDS)” was drawn up by ten European NGOs about their concerns over investment rules. This specifically relates to the environmental and health legislation which could be detrimental to multinationals and investors’ business ventures, meaning they could sue EU member states as a result.
This could lead to lengthy and expensive lawsuits between U.S companies and EU countries, not an aspect of the trade deal that either the EU or U.S would want. Negotiating all the complex bureaucracy involved in establishing a deal like this is difficult and so such problems are conceivable. Despite this suspension on the proposed investment rules, other aspects of the trade deal will continue to be addressed.
World Bank forecasts surge in global economic growth
Positive economic growth is being shown for the first time since the financial crisis in both emerging and developed countries. This has led the World Bank to forecast the fastest global economic pace in four years, reaching 3.2% this year.
The steady continuous development of the wealthy west, combined with the advanced progress China is making in terms of economic strength and market dominance has driven this growth surge. Andrew Burns, Director of the World Bank’s development prospects group, said that “For the first time in five years the high-income countries are going to be a second engine to the train of global growth”.
Economic growth in high income countries has been inhibited over the past few years by unsettled policies and fiscal consolidation, but as this is become less of an impacting factor the global economy will be able to grow by up to 2.2% in 2014.
The USA is expected to outperform other countries as the largest economy in the world and is predicted growth figures of 2.8% this year. If America does fulfil this it will be the ten consecutive quarter in which the country has grown.
Europe is also recovering well having posted a 1.1% increase this year after a 0.4% dip in 2013.
From 4.8% in 2013 the forecast growth for developing countries is 5.3% this year, followed by 5.5% in 2015. This is only marginally lower than the record high figures reached in the 2003-07 boom and demonstrates positive signs in the current climate.
It is essential to maintain economic conditions in order for this growth to be achieved. Any sudden changes to the market would be incredibly detrimental to any progress that has been made and concerns have been raised over tapering of the U.S Federal Reserve’s $85 billion a month bond-buying programme. If global bond yields start to rise and interest rates rocket they could cause an abrupt decrease in capital inflows to developing countries.
IMF revise global growth forecast
Managing director of the IMF, Christine Lagarde, announced that the International Monetary Fund will be raising its forecast for global growth at a press conference in Nairobi. The revision is expected to be made within the next couple of weeks.
The IMF lowered their growth forecasts last October when it was clear that the effect of the global economic and financial problems would hinder growth progress. The 2014 projection was cut to 3.6% and the 2013 growth estimate to 2.9%.
By raising its forecast, the IMF has announced a more positive outlook for the global economy after a period of strong recovery. The annualised rate of GDP growth between July and September last year was 4.1%, exceeding its 3.6% estimate.
The U.S Commerce department raised its growth forecasts to the highest since 2011 and projections for the UK economy were also increased. U.S President Barack Obama said that 2014 will be a “breakthrough year” for the US economy.
By performing so well, developed countries such as the U.S and U.K have negated the slower pace of emerging economies like China, India and Brazil, which economists were concerned would hinder global expansion and recovery.
The Office for National Statistics (ONS) increased its annual growth forecast from 1.5% to 1.9%.
Latvia joins the Eurozone
Latvia has joined the Eurozone on the second day of 2014, becoming the 18th member of the single currency.
Previously part of the Soviet republic, Latvia still depends heavily on Russia but its enrolment into the Eurozone and adoption of the Euro as its new currency hopes to reduce Russian reliance by strengthening links with the West.
Following the economic crisis in 2008 which threatened the country with collapse, Latvia made vast strides of improvement and is now the fastest-growing economy in the EU. Olli Rehn, an EU commissioner said that Latvia’s induction in the Eurozone marked “the completion of [the country’s] journey back to the political and economic heart of our continent”.
Entering into the Eurozone requires compliance with a number of stringent criteria, including low public debt, low inflation, and long-term interest rates. The fact that Latvia is in a position to provide all of these shows just how far they have come in a relatively short period of time.
The general attitude of implementing the Euro has been positive, with the Latvian government and most business owners optimistic that the new currency will attract more foreign investment and improve the country’s credit rating. The Latvian Prime Minister Valdis Dombrovskis said “It’s a big opportunity for Latvia’s economic development”.
New U.S Federal Reserve chair Janet Yellen is first woman in history
Janet Yellen will take over as chair of the U.S central bank when current chair Ben Bernanke ends his term at the end of January. She will be the first woman in history to occupy this position.
President Obama nominated 67 year old Yellen for the post after his former economic adviser Lawrence Summers faced opposition by the Democratic Party.
Yellen will have to manage the $85 billion a month (£50 billion) bond-buying economic stimulus programme. This “quantitative easing” has been unpredictable since last October when tapering of the economic stimulus was delayed due to economic problems and high unemployment in the U.S labour market.
The Federal Reserve’s decision to keep U.S interest rates low and help the domestic economy recover without causing instability in the global market was supported by Yellen in her position as vice chair. Bernanke announced in December that the bond-buying economic stimulus would be reduced to $75 billion a month after improvements in the U.S job market.
Monthly tapers of $10 billion are expected to be made until the bond buying measure is completed at the end of 2014. The Federal Reserve is keeping interest rates low however, to ensure the country remains on track with its positive economic recovery.
Four-year low for U.S trade deficit
The U.S trade deficit has reached its lowest level since October 2009 after the U.S Commerce Department released figures showing that the trade gap had fallen by 12.9% to $34.3bn (£20.9bn) in November. The driving force behind this boost is thought to be an increase in the number of U.S exports after oil sales were much higher than usual.
A 5.6% increase in petroleum exports pushed U.S exports up by 0.9%. At the same time a rise in imported cars redressed the balance tipped by a drop in the demand for foreign oil and imports fell by 1.4% in October. Sales of domestically produced machinery and aircraft also rose significantly.
Rescue plan for Eurozone banks
Taxpayers picked up much the cost of the European economic crisis that affected countries such as Spain, Greece, Cyprus and the Republic of Ireland particularly hard. EU finance ministers have been discussing a rescue plan to prevent taxpayer bailouts happening on this scale again.
In the future a new EU agency will have authority over failing banks and the way their collapse is managed. The European Parliament has not yet finalised how much responsibility this agency will have. European ministers have agreed that the responsibility of bailing out collapsing banks should be taken by investors and creditors rather than being left to taxpayers.
An EU Single Resolution Mechanism (SRM) is being established as part of the plan over ten years, with a joint rescue fund of approximately €55bn. Each EU member state would start with their own national banking resolution fund and then join together to make a central reserve.
The European Central Bank will have the authority of acquiring power over major Eurozone banks under a Single Supervisory Mechanism (SSM), implemented as a predecessor to the SRM. There will also be a joint guarantee scheme for bank depositors, replacing the individual national schemes under an EU-wide ceiling.
While some countries such as France are fully supportive of the new rescue, plan, others such as Germany are concerned that their domestic taxpayers will end up bailing out banks in other EU states.
The main aim of this reform is to prevent a repeat of the economic crisis. In order for this stability to be guaranteed, European banks must provide detailed recovery plans and if they do get into trouble, action will be taken immediately, rather than allowing it to develop further. Additionally, “stress tests” will be done regularly by the European Central bank to uncover any potential deficiencies and strengthen the Eurozone as a whole.
Global trade deal established by World Trade Organisation
The World Trade Organisation and its 159 member countries have agreed a global trade deal to facilitate international business and increase trade. This is centred on simplifying the bureaucracy of cross border trade and hopes to boost world trade by $1 trillion.
This is the first agreement the Organisation has made since it was founded in 1995 and is the first time the WTO has been unified on a single deal. The agreement will benefit every country by opening up market access and making trade much easier. Specific focus has also been given to poorer countries, helping them sell their goods internationally by improving duty-free access and increasing farm subsidies.
Africa has the longest customs delays in the world and so this new deal will be particularly advantageous in cutting through lengthy red tape administration. According to the African Development Bank, clearing goods through the Victoria Falls customs post from Zambia into Zimbabwe takes around 36 hours. After that there are 69 official checkpoints between Lagos and Abuja in Nigeria to pass through. This makes moving perishable goods becomes almost impossible in addition to adding further time and costs to the overall process.
The WTO hopes to encourage more people to conduct business internationally by reducing the time and costs involved with cross border trade. One aspect the deal does omit is reducing tariffs applicable on imported goods. By addressing administrative difficulties, which are estimated at twice the cost of goods tariffs, the deal targets the most expensive aspects with regard to expediting trade.
Some development campaigners have criticised the agreement known as the “Bali package” because of where the Organisation met. Nick Dearden from The World Development Movement said that “If the U.S and EU really wanted to tackle global poverty, they would have made the least-developed-countries package much stronger.” However, various world leaders, including UK Prime Minister David Cameron and the Indonesian Trade Minister Gita Wirjawan have supported the deal wholeheartedly.
A date for implementing the deal has not yet been set as the final details must be negotiated around the many domestic political factors from the 159 WTO member countries.
New budget deal agreed in U.S Congress
Congress was set a deadline of the 13th December to reach a new budget deal following the 16 day government shutdown in October. The divided house had guaranteed government funding until the 15th of January and extended the U.S debt limit to the 7th of February 2014, but a more definitive deal must be put in place to prevent further spending cuts.
The details of this second deal were decided by a Congressional budget committee who must also ensure that another government shutdown is not forced when government funding ends in the New Year. Two major parts of the new deal include federal services funding assured for the next two years and a decrease of $23bn in the federal deficit. Additionally, there is compensation for the $63bn automatic military and domestic spending cuts that were made after a failed budget compromise in January.
A vote in the House recesses will decide whether or not this deal is passed, but this could last for several weeks. Despite Congress remaining politically divided, Republican Congressman Paul Ryan is confident that the new agreement will be passed and Republican House Speaker John Boehner has also voiced his support.
The cross-party budget deal is attempting to make amends after the division over federal spending. Paul Ryan and Democratic Senator Patty Murray are chairs of the House and Senate budget committees respectively. Instead of raising taxes, bigger pension contributions from newly hired federal workers and additional federal costs, such as a $5 surcharge on airport security fees, will be taken.
Although the new agreement doesn’t include everything that President Barack Obama would like, he has stated that it is a compromise, “designed in a way that doesn’t hurt our economy”. Because of the huge division in U.S politics at this time, a compromise is essential to keep the government up and running. Another shutdown and further damaging spending cuts will be detrimental to the country in every respect.
In an estimation from financial services company Standard & Poor, the October shutdown cost the U.S economy $24bn. Under the new deal, approximately $85bn will be created over a ten year period, repaying up to $20bn of America’s $17 trillion debt.
Banks vote on Volcker rule
The Volcker rule is a ban on proprietary trading and forms part of the 2010 Dodd-Frank Wall Street reform act, set up to prevent a recurrence of the 2008 credit crisis. The Volcker rule was established as a direct response to the “London Whale” trading scandal at JP Morgan, where risky proprietary trading cost the bank $6.2 billion. The kind of speculative trading bets disguised as risk-mitigating hedges such as the “London Whale” are a fairly frequent event in the banking industry and this type of risky trading puts banks’ financial stability in serious danger.
By addressing this as well as other aspects of reform under the Dodd-Frank Wall Street act, bank regulators hope to strengthen the national banking system and reduce reliance on taxpayer bailouts to rescue failing investment banks. Global banks will vote to decide whether or not the Volcker rule will be included within U.S financial regulations.
If passed, the Volcker rule will prevent banks betting their own money on financial markets as well as owning more than a 3% stake of private equity or hedge funds. Federal Reserve Chairman Paul Volcker, who the rule is named after, led the proposal but final details will be announced by the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the three U.S. bank regulators.
It is expected to be passed the same day as the vote, although there has been some contention from the biggest investment banks. These will be hit the hardest cost-wise by the rule and could potentially lose billions of dollars in revenue. Further concern has been voiced over how the rule will affect banks’ profits and the way they facilitate client trading and hedging against market risks, both which are exempt from the rule.
Morgan Stanley, Goldman Sachs and Citigroup are among several major U.S banks that have already ceased their proprietary trading activities in anticipation of the Volcker rule. However, foreign banks such as Barclays, UBS, and Deutsche Bank are waiting to see how their operations will be affected as activities “solely outside of the US” are part of an exemption of the rule.
In Europe there has also been movement with regard to implementing a similar regulation, although the challenge is much bigger, ensuring the new rule is compatible with the different regulations of different jurisdictions across the region.
The deadline for affecting the Volcker rule in the U.S is currently July 2014, but this could be extended to July 2015 if ruled by the Federal Reserve.
Pro-European demonstrators protest against Ukrainian government
The Ukrainian parliament’s decision to withdraw from an EU integration agreement has been a source of controversy in the country. Pro-European protesters have been demonstrating against the parliamentary judgment this week, voicing their dissatisfaction in public squares and even barricading government buildings to prevent access to officials.
Financial problems have plagued the Ukraine over the past few years and the cost of insuring the country’s debt against default has risen to the highest since January 2010. The government have been struggling to make essential foreign debt repayments as well as manage smaller financial aspects such as state staff wages.
The Ukrainian Prime Minster Mykola Azarov and national government decided to postpone an agreement with the EU over trade and association over pressure from both Russia and the EU. Russia has been clear in its attempts to prevent the Ukraine siding too much with the EU and has threatened the country’s trade avenues as a deterrent. Ukrainian officials say that to negate this Russian pressure the EU offered financial aid, although this has not been confirmed. President of the European Commission, José Manuel Barroso, did state that any negotiations over the terms of the agreement had now closed.
Pro-European protesters and the political opposition leader Arseniy Yatseniuk called last week for Prime Minister Azarov to be sacked. However, they blew their chance when an opposition “no confidence” vote in parliament failed to achieve the 226 MP votes it needed to eject Azarov from his position. It is unclear how the Ukraine will rebalance its political unrest but this is essential for the country to remain financially afloat.
Eurozone factories increase production
Markit’s Purchasing Managers’ Index on factory activity in the Eurozone during November shows a rise of 51.6 from 51.3 in October. A PMI above 50 indicates growth and this is the fifth consecutive month where Eurozone member states have recorded a reading above this level. This is a hugely positive sign for recovery in the area, although there were highs and lows for some member states.
Germany once again has been leading the way. Europe’s largest economy has been boosted by new business and increased factory output, recording a PMI of 52.7, up from 51.7 in October – the best reading since mid-2011.
Greece, one of the countries that have suffered the most as a result of the economic downturn, also performed well with a PMI of 49.2. This rose from 47.3 in October and is the first time since September 2009 that factory output has increased.
Italy was another country that showed positive signs of growth; its PMI of 51.4 in November, a 0.7 increase from the previous month, indicates fastest growth pace in two and a half years.
Other countries, particularly France and Spain, did not do so well. France’s PMI dipped to 48.4 from 49.1 in October and the unemployment rate has been affected by the number of staff cutbacks made by French manufacturers. Similar problems in October caused the French economy to shrink slightly and President Hollande is keen to avoid this by lowering the unemployment rate.
Spain has been consistently ranking a PMI over 50 for the past three months but in November fell below the mid-point, exposing the vulnerabilities of the country’s recovery.
The Eurozone economy remains in a vulnerable state, despite the PMI generally showing good results. Chief economist for Markit, Chris Williamson, said that “as companies seek to become leaner and more competitive” unemployment becomes more of an issue. The imbalance in the positive and negative growth in the Eurozone must be addressed in order for the region to fully recover itself, but the progress of countries such as Germany and Spain will certainly be effective in helping the struggling economies.
German government coalition deal agreed
Two months after the elections in Germany, and 17 hours of negotiations later, Angela Merkel’s Christian Union (CDU/CSU) and the Social Democrat (SPD) party agreed a coalition deal. Both parties signed a 185-page agreement called “Shaping Germany’s Future”.
In the September election the CDU won 41.5% of the vote and the SPD won 26%, with the remainder shared between the Greens and the Left Party. This will be Merkel’s third term as the German chancellor.
The coalition agreement incorporates the main aspects of each party’s platform, with the Christian Democrats ensuring that taxes will not increase and the Social Democrats achieving a national minimum wage of €8,50 and lower retirement age of 63 for pension contributing workers.
Further points of the deal include dual citizenship for children born in Germany after 1990 to foreign parents, levies on German motorways for foreign motorists, and of 40-45% energy production to be from renewable sources by 2025.
With regard to the financial situation in the Eurozone, the agreement stated that Germany would be opposed to the mutualisation of Eurozone debt and that from 2015 there would be no new debt at federal level. Government spending will be offset by incomes.
Leader of the SPD, Sigmar Gabriel, and Angela Merkel announced the deal on Wednesday, with Merkel stating that the coalition stood for “solid finances, secure prosperity and social security”. Additional cabinet posts will not be decided until after the SPD vote.
Following the coalition announcement, German shares rose and continue to be the highest performing in Europe. This demonstrates that the coalition is not just positive for the future of German politics after a period of indecision, but also for investors and traders.
The next challenge for the new German government is to stabilise the European economy and manage Eurozone banking and debt difficulties.
ECB concerns over U.S Fed Reserve tapering plans
Janet Yellen, the Vice Chair of the Board of Governors of the Federal Reserve and is expected to start the tapering of the Federal Reserve’s asset purchasing scheme in March 2014. However, in the European Central Bank’s bi-annual Financial Stability Review published yesterday, the ECB highlighted concerns over the tapering plans.
Tapering of America’s asset purchase scheme, worth $85 billion a month, has been put on hold in attempts to protect the U.S and global economic development. The fact that European stocks were boosted by this decision shows that it was the right one to make. Among others, London’s 100, Paris’s Cac, and Hong Kong’s Hang Seng index all enjoyed increases.
However, the vulnerable global financial system means that the risk of disturbance is still high. The European Central Bank has cautioned that any movement towards tapering could cause market shocks which would be disastrous in this volatile situation. Areas such as the foreign exchange market and future asset price developments have been marked by the ECB as those most likely to be hit hardest, with emerging markets already having to compensate for changing U.S financial policies.
According to the ECB, “stable and predictable macroeconomic policies” in conjunction with “forward guidance” is required to settle financial policies and avoid returning to an economic crisis. Cooperation between the U.S and Europe is crucial to ensure that the recent positive signs of recovery in the global economy are not undermined.
South Carolina to open world’s largest wind turbine test facility
A new $110 million Energy Systems Innovation Centre in North Charleston, South Carolina is due to open in March 2014. With the estimated value of the U.S wind energy market thought to reach $100 billion by 2033, Charleston, South Carolina looks like the place to be. Boeing certainly think so, having invested $1.1 billion in the area over the past 8 years. Once open the Energy Systems Innovation Centre will be the world’s most powerful wind turbine testing facility.
Maintenance is one of the biggest costs associated with running wind turbines. By testing the rigs and 110 metre blades manufacturers can be sure that the turbines will work efficiently and reliably for their 20 year life span. The need for costly and challenging maintenance to fix any problems will bring overall costs down significantly and boost both the power output and profit that the wind turbines generate.
On its six acre site, the Energy Systems Innovation Centre in North Charleston features two massive testing rig dynamometers. These stimulate a range of wind conditions similar to those that the turbines will face when established, including hurricane settings. The amount of power that the two rigs can generate is 7.5 to 15 megawatts.
The state of the art Innovation Centre reduces the testing of factors such as torque, pitch and speed into just a few months rather than years. The facility will be open for use by any company or manufacturer that requires it and will be able to rent it for as long as they need in order to fully test the product and overcome any last minute issues.
Last year 3.5% of all electricity generated in the U.S was done so by wind. This is approximate to 60 gigawatts and can power 15 million homes. The U.S Department of Energy wants to increase the usage of wind power even more and estimates that by 2030, 20% of national electricity will be wind generated. This is great news for renewable energy, the environment, and the U.S industrial sector which can only benefit from these changes in energy production.
U.S unemployment levels decrease
The rate of unemployment in the U.S decreased across 28 states in the month of October this year. A further 11 states levelled out their unemployment rate with the final 11 seeing a slight rise. The ratio of adding new jobs was also positive, with 34 states adding jobs and just 15 cutting them. New Jersey, Washington state, and Kentucky lost the most while Florida, California and North Carolina experienced the greatest job progression.
In terms of the lowest unemployment rate, North Dakota came out on top with just 2.7%, closely followed by South Dakota with 3.7%, and Nebraska in third with a rate of 3.9%. Nevada had the highest unemployment rate with 9.3%, although this was an improvement from September, with a fall of 0.1%. Other states with relatively high unemployment rates included Rhode Island (9.2%), Michigan (9%), Illinois (8.9%), and California (8.7%).
Florida in particular enjoyed a significant rise in the number of jobs added to the state labour department. Sectors such as professional services i.e. accountants and engineers, construction, restaurants and entertainment gained more than 44,600 jobs. A further 39,800 were added in California, across government, education and health, transportation, and retail sectors.
204,000 jobs were added in total in the U.S during the month of October. This was confirmed by the recently released government job report. These figures depict an increase of 41,000 jobs between September and October 2013, contrasting to the 0.1% increase in the national unemployment rate.
The positive outcome of this shows that the impact of the 16 day government shutdown in October was much less than anticipated on the labour market and that many U.S states have managed to weather the temporary cutbacks with minimal damage.
New €150bn EU bank bailout
According to a source from The Times, the European Parliament has proposed a new €150 billion bailout fund for European banks.
Unpublished documents from negotiations between the European Commission, European Council, and European Parliament over a new bailout regulation revealed Parliament’s plans. A deadline of December has been set to achieve a resolution over ending bank bailouts.
The European Commission and Parliament have very different ideas about how to manage bailout funding. The European Commission wants to force banks into accepting responsibility for losses instead of being bailed out. It wants to do this by setting up a smaller Eurozone fund to cover operational costs of keeping a bank afloat while the bondholders take action.
On the other side, the European Parliament wants to create a comprehensive fund to bail out any banks that need it in the Eurozone. Whether weakened European economies would be able to manage this huge cost is debatable however.
Figures documented show just costly the financial crisis would have been to the European market if it had not been bailed out by taxpayers, depositors and investors. If the European Parliament’s plans had been in place from 2008 the cost would have totalled approximately €157 billion. The European Commission argues that the European market could have managed the collapse without support from taxpayers if its own system had been fully implemented.
For the first time these figures also show the costs to the individual: Taking an average failed large EU bank with 10% losses on its assets would have caused €47 billion of losses for shareholders, €15.6 billion for junior bondholders, as much as €35 billion for senior bondholders, and €14 billion for depositors of more than €100,000.
Laying the financial costs on the table makes risk assessment of the bailout much clearer. However, the opposing plans from the European Commission and European Parliament make a compromise look difficult to achieve although one is necessary to boost economic recovery in Europe.
Brussels talks on EU and US trade deal
A week of trade talks in Brussels has brought the bilateral trade deal between the European Union and the United States has taken a step further towards closing.
EU officials say that if the deal is agreed it will be the biggest trade relationship in the world. It is valued at more than 2bn euros (£1.7bn) a day, and will change the future of global trade.
The economic gains that will arise as a result of facilitating trade across the Atlantic Ocean are understood by the U.S and the EU, both of whom are eager to agree on a deal. Estimation by the European Commission has put the total financial gains at more than €300bn annually.
However, there are still numerous obstacles to overcome before the trade channel can open. Many of these are centred on the regulation of trade – the most profitable area of the agreement. The success of the trade deal ultimately rests on ensuring that every piece of legislation is in line.
Conducting business between the U.S and the EU currently requires compliance with two lots of bureaucracy. This is in place for safety reasons but does make the process longer and more difficult. If the safety levels of both markets are in line and standards match, business will be expedited.
This is known as “mutual recognition” and is the same structure that is in place in the European Union. It promotes trade between member countries as well as strengthens the European economy internally.
Agreeing on the deal is made easier by the number of bilateral enterprises that already exist between the EU and U.S and recent talks have made advances, but linking the two biggest economies in the world is not going to be a simple task and finalities still need to be resolved.
Spain and Italy warned about budget plan compliance
2014 draft budgets for Spanish and Italian spending may not comply with new debt and deficit rules according to the European Commission.
Spain’s spending plans showed that the country would not be able to return to EU financial rules until 2016 at the earliest. Plans by France and Holland have only just met regulations and Finland, Luxembourg and Malta are being closely reviewed.
If non-compliance is found in any aspect of the national plans, the country concerned will be required to amend and re-submit their budget to their respective national parliament.
Under EU ruling, Eurozone members must balance their budgets by cutting deficits. As a result of the European and global economic climate, some flexibility is provided if a country’s deficit falls below the EU ceiling of 3% GDP and their debt levels are on the downturn.
The European Commission currently has several Eurozone member countries under “budgetary surveillance”, including Austria, Belgium, Croatia, Estonia, Finland, France, Germany, Italy, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Slovakia, Slovenia, and Spain.
A serious concern in the Eurozone at this point of the year is deflation. The European Central Bank has attempted to address the threat of deflation by cutting interest rates, but if it continues it will negatively affect debt problems and consumer spending.
In October prices fell in 11 countries of the Eurozone as well as the region as a whole, but over the past twelve months prices have risen, showing a slowing of growth.
Interest rates cut by European Central Bank
In an attempt to avoid a deflation collapse in the Eurozone, the European Central Bank has decreased its interest rates to 0.25% EPA.
Eurozone inflation reached a four year low at 0.7% this year.
As a result, the ECB made interests cuts earlier than analysts anticipated, dropping the main rate from 0.5% to 0.25% this month. Already this has had a positive effect, lowering the Euro, increasing government bond prices, and causing share market highs.
The marginal lending facility interest rate has also decreased, being cut 0.25 percentage points to 0.75% but interest rates on the ECB’s deposit facility have remained the same, avoiding taking it into negative figures.
While the threat of deflation is still present in the Eurozone, the ECB’s pro-active stance has helped the strength of the Euro against the dollar.
UK GDP growth fastest for three years
Official GDP figures showed economic output in the UK between July and September increased by 0.8%, the highest since 2010. Following on from the 0.7% growth between April and June, this continued acceleration of the economy is great news for recovery.
According to the Office for National Statistics, all sectors had been performing well, with good results across the board. George Osborne Chancellor of the Exchequer said on Twitter that “Britain’s hard work [was] paying off”.
Some sectors in particular that had been badly affected by the recession in the UK have been on the upturn. The construction sector grew by 2.5% this quarter according to ONS data, with production increasing by 0.5%, and manufacturing by 0.9%. The services sector, which provides three-quarters of economic output in the country, rose by 0.7%.
With positive output for three consecutive quarters, UK GDP is now 0.4% above 2008 first quarter figures just before the recession hit. Despite this, economic activity is not completely back to pre-recession levels. A balanced recovery is required for the country to get back on its feet, and manufacturing and construction sectors still have a way to go.
However, this quarter the UK looks set to record the fastest quarterly growth rate of the G7 countries. Maintaining positive output in the long term is the key to a full recovery and the real challenge facing the country, and this positive economic output is a great start.
Eurozone business growth slows
The Eurozone emerged from the economic recession with an injection of business growth pushing the economy to positive figures. The acceleration of pace has been steady since June but for the first time this year has slowed. The services sector in particular has fallen slightly.
Early figures released from this quarter’s Purchasing Managers’ Index (PMI) demonstrated a decrease of 0.7 to 51.5 last month. The PMI is produced by collating research from over 30 countries worldwide.
PMI data is formulated from the sum of the percentage number of answers that showed improvement (P1), no change (P2), and deterioration (P3). INDEX = (P1*1) + (P2*0.5) + (P3*0). With a reading above 50, the PMI of the Eurozone therefore shows approximately no change, which still indicates growth in the current rising climate.
A leading factor in the end of the recession was the positive economic growth from both Germany and France which exceeded growth forecasts. Progress has since slowed, with Germany posting the slowest growth in October for four months.
Spain however has been showing signs of picking up. The country that has been suffering with the worst unemployment levels in history has finally posted positive economic growth of 0.1% between July and September. This is the first positive growth in two years. The unemployment rate also fell from 26.3% to 26% in the third and fourth quarters respectively.
Chief economist at leading PMI producer Markit, Chris Williamson said the PMI survey data had been positive for four consecutive months and at the beginning of the last quarter expansion was continuing at a quarterly rate of 0.2%, indicating “ongoing, albeit sluggish, recovery”.
IMF bailout for Slovenia
The International Monetary Fund could give out a multibillion-euro bailout to Slovenia in attempts to rescue the country’s failing banking system. If the bailout did go ahead, Slovenia would be the fifth country in the Eurozone to receive financial aid during the economic recession.
With €7.9 billion worth of debt caused by the poor management of state-owned lenders and unnecessary risk taking, Slovenia is struggling to prevent a banking collapse. Much of the problem lies in Slovenia’s state-owned banking sector, but decreased domestic consumption, reduced export trade, and lack of investment capital were all contributing factors of the 2012 recession.
After producing negative economic growth last year, the Organisation for Economic Co-operation and Development predicted that Slovenia would continue this trend in 2013 and that without reform, public debt in the country could rise to 100% by 2015.
Initial advice from the OECD was to place the banks with the highest chance of recovery under private authority and let the worse affected banks collapse under controlled circumstances. Urgent bank recapitalisation is needed if Slovenia is to have any chance at recovery without accepting a financial bailout.
Bostjan Jazbec, Bank of Slovenia governor and European Central Bank board member, is hopeful that Slovenia will not be forced to receive financial aid. This stance echoes concerns that Slovenia will struggle to cope with the strict bailout conditions set by the IMF.
The Slovenian government have begun recouping costs from other areas to produce a €1.2 billion recapitalisation fund for the country’s major banks. This has been done by raising taxes, privatising several banks and making spending cuts, but it may not be enough. What it does show is the determination of the Slovenian government to make their own recovery.
Whether or not Slovenia needs an international bailout will be determined from the results of a ‘stress test’ measuring the full extent of the country’s debts in November.
Federal Reserve taper still unclear
Last month the Federal Reserve announced that it would not begin tapering its economic stimulus due to the economic instability and concerns over affecting recovery.
This month, tapering of the $85 billion-a-month bond-buying programme has still not been scheduled with the Federal Reserve stating that they would be maintaining the current economic stimulus. There was no hint of when tapering may start, but as we are halfway through the last quarter of2013 it looks like it may not be until early 2014.
The Federal Open Market Committee said that it “sees the improvement in economic activity and labour market conditions since it began its asset purchase programme as consistent with growing underlying strength in the broader economy”. Movement of the Federal Reserve’s economic stimulus could have serious ramifications on the economic recovery of the US and this delay in tapering is throwing caution to the wind.
Moderate economic growth was recorded this month in the USA, but many economists realise that the country has not yet completely absorbed the impact of the two week Government shutdown. Economic progress looks set to be the dictator of the pace purchasing adjustments in the next couple of months.
Two year long Spanish recession ends
Between June and September this year, the Spanish economy recorded a 0.01% increase in GDP, finally ending the two year long recession.
Spain, along with Greece and Cyprus, has suffered the most during the economic financial crisis. For the first time in Spanish history, unemployment rates in the country rose to over 6 million. 4 million jobs were lost in four years, and the unemployment rate rose to the second highest in Europe at 27.16%, just behind Greece at 27.2%.
During the worst of the recession, almost 2 million households in Spain had no employment income. Nearly 50% of the unemployed workers have been out of work for over a year, with 25% being out of work for more than two years.
The tiny increase in Spanish GDP is hugely significant, and shows that the country has turned a corner onto the road of recovery. Strong exports could provide more output, with cut price unit labour costs offering foreign investors affordable opportunities. The attitude of investors towards Spain parallels the positive economic shift, giving confidence not only to the Spanish government but to the struggling Spanish citizens.
A great example of the business opportunities presented by Spain in its current economic state was demonstrated by Bill Gates who recently made a €113.5m investment in Spanish construction group FCC, buying a 6% share of the company. In addition, the Ibex-35 stock market index has increased, although Spanish bond yields are still yet to make progress.
Unemployment also has a way to go before improving, but the rate has slowed which could indicate a turn for the better in the near future. The 0.01% GDP increase is the start of Spanish economic recovery, but whether this will continue through the final quarter of this year will depend on the assessment of data by the national statistics office.
Impact of the U.S shutdown
The U.S government shutdown was ended with a cross-party deal just one day before breaching the debt ceiling deadline on the 17th October.
Republican and Democratic senators struck the deal at a decisive point, narrowly avoiding national default. A significant part of the agreement extends the US debt limit to the 7th of February 2014, with government funding guaranteed until the 15th of January.
Looking towards the future now, what impact will the shutdown have with regard to US investment?
The credibility of the US dollar came under analysis during the partial government shutdown that affected millions of US workers. China called for the dollar to be taken down as the world’s only reserve currency, although in terms of replacement, there is no currency strong enough to hold its own at the centre of the global financial structure.
Concern has also been raised with the US losing its top Aaa credit rating this year. This could affect investment in the US treasuries and is a direct result of the shutdown.
In the 2013 Sovereign Risk Index, published by fund management corporation BlackRock, the US was ranked in the second tier with South Korea and Peru, under Singapore and Australia in the top tier. The Sovereign Risk Index measures a country’s flexibility regarding their financial situation and their compliance with repayments. The UK, the Philippines and Thailand all stand below the US in the third tier.
The Senate Bill to reopen the government included a number of state conditions in addition to the extension of the US debt limit. An increased budget was agreed for a Western Kentucky dam project to $2.9 billion, and $450 million of financial aid authorised to help rebuild roads in Colorado after severe flooding.
U.S government shutdown
Congress’ failure to reach a budget over disagreements about Obamacare has caused a partial shutdown of the U.S government.
‘Non-essential’ workers have been forced to take unpaid leave, closing national museums, parks, and attractions across the country. Work in government agencies is regarded as ‘essential’ and over 700,000 employees are required to work without pay. There is no guarantee that back pay will be granted once the situation has stabilised.
The United States’ Securities and Exchange Commission will remain open, having enough funding to continue its work as national financial and securities regulator for a short period of time during this shutdown.
This is the first shutdown in 17 years and a major contributor to this stalemate was the Republican-led House of Representatives’ insistence on delaying the passing of Obama’s healthcare reform.
Consequently the dollar has already fallen in value and Goldman Sachs said that US GDP could drop by 0.9% this quarter if the shutdown continued for up to three weeks.
The Federal Reserve, Department of defence, Department of homeland security, and Justice Department will not be disrupted. The U.S postal service will also continue to run. However, the State department can only stay open for a limited period of time, and both the Department of education and Department of health and human services will be hit by cutbacks.
Congress has a deadline of the 17th October for extending the government borrowing limit at which point it will reach its debt limit. The economic impact of the shutdown will have significant ramifications in America’s recovery.
Further bank bailouts to come in Brussels
Last year a €500bn (£420bn) rescue fund known as the European Stability Mechanism was established to aid the financial situation in the Eurozone.
This year the European Central Bank (ECB) is due to undertake a detailed review of the finances of Eurozone lenders, obtaining advice from investment banks and support staff to help lenders that may be in trouble.
There are some concerns that this review will uncover bad debt problems with lenders in countries such as Spain, Italy, Portugal, and France and maybe even Germany.
Despite positive statistics, particularly from Germany’s strong economy pulling the region out of the recession, many underlying problems of the debt crisis remain. Countries such as Spain and Portugal are still struggling with record high levels of unemployment, Greece is dependent on a third bailout instalment due in November, and Germany is facing decreasing numbers of Chinese exports.
A significant turning point could arise after the German political election in which Angela Merkel is campaigning to return to power. She has set out aims for achieving closer European ties and this could lead to increased help for struggling Eurozone economies such as Greece and Cyprus.
Implementing a banking union has previously been proposed to bring about a closer union between Eurozone member countries. This would give Brussels predominant authority over failing banks and how they would be managed. The European parliament has already passed laws giving control of bank regulation in the Eurozone to the European Central Bank, setting the wheels in motion.
However, the European Central Bank requires a full audit of the situation before they take on this responsibility. In addition to checking for any debt problems in the books of Eurozone banks, the European Central Bank is also expected to unify accounting rules.
US central bank decision boosts European stock markets
The state of the global economy has affected the Federal Reserve’s decision to begin tapering its economic stimulus this month. It has decided against changing its $85bn (£54bn) bond-buying plan and as a result, increases have been seen in both European and Asian stock markets.
London’s 100 index rose by 1.23%, Paris’s Cac by 1.32%, Frankfurt’s Dax by 1.15%, Japan’s Nikkei 225 by 1.5%, Hong Kong’s Hang Seng by almost 2%, and Australia’s ASX 200 by 1.2%, which is the highest in 5 years.
Despite speculation from investors that the US central bank would be making reductions in its monthly bond-buying plan, the Federal Reserve stated that it would not begin tapering in September. This is mainly due to the high unemployment levels and slow progress of recovery in the US economy. The growth forecast for the bank decreased to between 2.0% and 2.3% for the month of September.
The Federal policy seems to be adjusting their pace of purchases on global economic development, allowing for sensitivity in certain foreign markets. In particular this appears to be aimed at emerging markets like Asia. Growth and structure weaknesses can be exposed if constant stimulus is applied, and instability in the market at a time like this could cause serious problems with economic recovery.
In May this year speculations that the Federal Reserve would be tapering provoked investors to move their money out of the country resulted in an increase of sell-offs. Asian markets offering high returns saw a significant amount of investment which weakened the currency as a whole.
The Federal Reserve will meet again in October but it looks like tapering will continue to be avoided. Although this process is beneficial for the stock market, it does not help the US labour market which has been struggling over the past five years. Also on the policy meeting agenda is bringing the asset programme to an end in order to stop markets operating on a “borrowed tab”.
Economic growth in Germany and France
Positive economic growth has emerged from both Germany and France during the second quarter of this year. By exceeding projected figures, this growth has dragged Europe up and out of the recession for the first time in years.
The German economy has long been regarded as the powerhouse of European economics and its strength has contributed significantly to the region’s recovery. The first quarter of this year saw a plateau in economic growth followed by a rise of 0.7% in the second quarter.
France is also a key member of the Eurozone both in geographical size and political weight. Its 0.5% rise in Gross Domestic Product between the months of April and June after overcoming a 0.2% dip in the first quarter has also been instrumental in ending the European recession.
The main driver for this growth was consumer spending which was calculated at 0.3% within this second quarter. Although the figures are small, every little increase has helped to boost the European economy and aid recovery.
French Capital Gains Tax Changes
On the 16th June 2013 French President François Hollande announced a change in the French capital gains tax system. Specifically these changes affect the sales of second homes in the country.
The French property market has been notoriously stubborn over the recent period due to the economy, tax rates and financial recession, and changes to capital gains tax in the country hope to inject some flexibility and create movement.
Budget Minister Bernard Cazeneuve drew up government plans to reform the real estate capital gains tax in France leading to these changes. This will apply to capital gains realized from the sale of real estate, other than a taxpayer’s main residence and rented property.
The changes will be included in the 2014 finance bill and come into effect from the 1stof September 2013:
- Progressive tax reductions on the holding period of capital gains. The qualifying period for full exemption from income tax on real estate capital gains is lowered to 22 years, from 30 years.
- Progressive social levy reductions for social contributions (CSG/CRDS). After 30 years complete exemption from social contributions will be granted.
- A 25% tax reduction will apply to property sales realized between September 1, 2013, and August 31, 2014 to give an initial boost.
- Government fiscal incentives encouraging constructible land retention are due to be abolished in favour of the housing development market.
Most significantly, these tax reductions will increase the accessibility and profitability of the French property market. A short term reduction of 25% should boost activity quickly as well as kick-start a longer term recovery in the property market.
Slight rise in Italian VAT
On the September 27th the Italian Council of Ministers met to discuss the proposed VAT increase. Their aim was to postpone the VAT rate increase to the 1st January 2014 but unfortunately a decision was not made.
As a result, from the 1st October 2013, the standard rate of VAT in Italy goes up from 21% to 22%.
Other rates of taxation in the country remain the same, including the minimum rate of 4% and the reduced rate of 10%.
EU politics rally to save failed banks
The collapse of EU banks during the financial crisis has cost European taxpayers more than €1,600 billion since 2008. Final bailout conditions are in the process of being agreed by the European parliament and EU member states, with the aim to establish a central authority and integrate finances in the long term.
By establishing a central authority, possibly to be located Brussels, the power to shut down banks in the Eurozone will be more focused, with fewer contributors ensuring fewer restrictions to contend with.
Through the support of the bailout plan, failed banks receive money directly from common Eurozone rescue funds. The bailout criteria set out the conditions to which they must comply. By receiving this huge monetary support, the effect of the collapsed banks on weakened economies should be minimised. Recovery will be expedited by aiding banks with the potential to recover and shutting down banks that are no longer able to be rescued.
From 2014 banks within the Eurozone will be managed by the European Central Bank. The changes that are being made affect shareholders and creditors, and Wolfgang Schäuble, Germany’s finance minister, stated that they would be “liable first and foremost”.
This comes from the fact that under the political agreement shareholders and bondholders as well as some depositors may be forced to make contributions to failing banks. This legislation will not come into effect until 2018 and certain exemptions will be available for small companies and uninsured deposits of individuals below €100,000.
Legislative Changes to Limited Liability Companies in Austria
The Austrian Parliament passed the Austrian Limited Liability Corporation Act on June 12, 2013, significantly reducing the minimum share capital requirements. New legislation under the Act will be effective from July 1, 2013 and is designed to make Austria a more favourable business location in order to increase inward investment.
Predominantly these changes affect the costs involved in setting up a Limited Liability Company, or Gesellschaft mit beschränkter Haftung (GmbH), in Austria. Before the Act was passed the minimum share capital stood at €17,500 and required half to be fully paid up. This is a relatively high fee compared to the rest of Europe and the national government recognised this as a potential disadvantage to foreign investors when reviewing Austrian business practices and costs. As a result, the minimum share capital requirements were cut to €10,000, a reduction of €7,500, with half to be paid up.
This now makes the costs of incorporation in Austria much more competitive compared to the rest of Europe and Limited Liability Companies a much more accessible form of business. The legislative changes also put the country’s business laws more in line with international standards, all of which make Austria a much more attractive location for investment.
Furthermore, additional costs involved with setting up an Austrian Limited Liability Company have been affected, reducing costs for the notary public and simplifying requirements to do with the publication of company details. Electronic entry into the official register of the administration of the judiciary (Ediktsdatei) succeeds the requirement to officially announce the company in the federal gazette (Wiener Zeitung), therefore eliminating the costs for this entirely.
As well as taking advantage of the newly simplified costs and requirements, investors can also benefit from the liability reductions on corporate income tax that occurred proportionally to the reduction in share capital amounts. The minimum corporate income tax rate of 5% is calculated from the minimum share capital, decreasing liability from €1,750 to just €500 per year.
Some concerns over creditor protection have arisen from these changes and so the new law requires a shareholder meeting to be held if, under the Corporate Restructuring Act (Unternehmensreorganisationsgesetz), the equity ratio is below 8%, the fictitious debt repayment period is projected to be longer than 15 years, or if half the minimum share capital has been lost.
Britain seen as EU ‘safe haven’
Throughout the global downturn many strong countries such as the US and much of Europe saw a significant slump in foreign investment. Despite Britain battling a national recession, foreign investment into the UK actually rose by 22%.
This compares to a 42% decrease in Europe and 21% in America. Overall $62 billion was invested in Britain in 2012, a figure released by the United Nations body in charge of trade and investment.
Germany’s financial strength during the Eurozone financial crisis was in no way matched by its investment, which was the lowest in Europe. The 86% decline demonstrated the country’s reliance on currently unstable Eurozone nations.
In contrast, Britain’s investment is much more diverse and finance from outside Europe contributed greatly to their positive investment growth last year. Reinvestment from foreign companies increased significantly from the previous years’ number, and this $11.7 billion was the main dynamic for elevated investment in the UK.
Inclusively, global foreign direct investment depreciated by 18% in 2012. The 32% decrease of foreign investment into established countries meant that investment into developing countries was greater for the first time.
Hafiz Mirza, head of development issues at the UN Conference on Trade and Development, said that “the UK is seen as a safe haven. It’s a place companies want to invest in now and in the future”.
G8 Lough Erne Declaration
Taking combative steps to prevent the prolific use of tax havens was top of the agenda for David Cameron at this year’s G8 summit. Despite the summit being slightly overshadowed by debates over Syria all G8 leaders agreed to sign the Lough Erne Declaration.
The Lough Erne Declaration details criterion for the future of tax evasion. A major aspect of this is the focus on private enterprise, “which drives growth, reduces poverty, and creates jobs and prosperity for people around the world.” There is also an acceptance of responsibility for all leaders to ensure proper regulation. Cameron was eager to push through increased transparency and the Lough Erne Declaration includes this, as well as fair taxes and open trade.
Automatically sharing tax information and obtaining owner details from shell companies – a common vehicle used to manoeuvre investments through loopholes in the law – will attempt to close down on corporate tax evasion and money laundering.
The Organisation for Economic Co-operation and Development (OECD) plan to utilise and develop an existing tax sharing system to use globally. The system was initially set up by the five largest European economies and the USA to facilitate tax sharing internationally.
In addition UK Chancellor George Osborne and the US White House revealed plans for setting up a register of companies and their owners to ensure better management of corporate taxation.
Cameron’s “The Three Ts” – tax, trade and transparency not only succeeded in signing the Lough Erne Declaration, but also in launching free trade negotiations between the EU and US. Cameron described this as “the biggest bilateral trade agreement in history”.
Lower business taxes to encourage multi-national corporations to set up in Britain
As part of his plans for the G8 summit, David Cameron has announced that business taxes are being reduced in order to make Britain a more attractive location for multinational businesses.
This move is the first positive reaction by the British government regarding the involvement of major companies in tax evasion. By legally facilitating businesses operating from Britain the tax regime could both encourage further investment into the country and prevent tax avoidance on such a blatant level.
Changes to the tax system were revealed in the March budget and show the rate decreasing by a significant 4% this year (from 28% to 24%), and a further 3% the following year (24% to 21%). This means that by 2015, Britain could have one of the lowest corporation tax rates in the west.
IMF criticise US budget cuts
The significant federal budget cuts implemented by the US at the beginning of this year have come under criticism from the International Monetary Fund (IMF) who called US plans reducing the economic deficit “excessively rapid and ill-designed”.
In the IMF annual report on the US economy, the considerable budget cuts were blamed for impeding economic recovery by as much as 1.75% this year. A growth forecast of 1.9% demonstrates slow improvement and the IMF argue that if tax increases and spending cuts had been brought in more slowly, the forecast could have reflected 3.65% growth. The IMF forecast growth of 2.7% for next year.
The advice given to the US with regard to their medium-term growth is “slow down but hurry up”. Although this sounds like contradictory advice, IMF are making the point that starting off slowly and easing into financial changes will ultimately benefit in the long run in terms of growth and stability.
Overall the US economy has met with approval from the IMF, with the housing market recovering more quickly than expected and the jobs market looking set to expand in the latter half of this year. In addition, the prospering US energy market and investments in business are contributing to the gradual recovery of the US economy as a whole.
David Cameron’s G8 battle plan on tax havens
Preceding the G8 summit next week, David Cameron is making plans about tackling the key objectives on the agenda: putting a stop to the prolific use of tax havens, attempting to organise a Syrian peace conference, and beginning talks for trade between the US and EU.
Despite resistance, Cameron has made positive steps towards changing tax haven legislation in UK overseas territories and crown dependencies. Their tax secrecy is part of the reason tax evasion is such as issue and one method of closing down legal loopholes is to make the universal sharing of tax information automatic.
The British Virgin Islands are classified as British Overseas Territories but are not an official part of the European Union. As a result the islands are not directly subject to EU law and so are regarded as havens for tax evasion. However, as British citizens, islanders are also considered to be EU citizens as well. In attempts to get the overseas territories to commit to stricter tax legislation, Bermuda has agreed to participate with the sharing of tax information in joining the British Virgin Islands.
In terms of the EU-US trade talks, the European commission has been preparing to give member countries a greater say in any negotiations that will inevitably occur once talks begin. This is thought to facilitate members’ involvement and support of the talks, particularly with regard to France.
Economic prospects brighten for UK businesses
The latest business surveys suggest that things are looking up for most UK businesses. Forecast growth from the CBI business lobby group is only 1% but this is a move from “flat to growth” which is a slight improvement.
In particular the services sector has renewed confidence, although manufacturing companies are not so hopeful. Instability in the Eurozone as well as economic challenges are not encouraging conditions for investment and businesses have been suffering as a result.
Inflation is certainly a contributing factor to this, peaking at 3.1% this quarter and affecting consumer living standards.
This increase in confidence is voiced by John Cridland, director-general of CBI who said, “Amongst CBI companies, there’s a general sense that the forward mood has brightened a little.”
The government’s Funding for Lending Scheme seems to be working and small to medium businesses are feeling that support in credit costs and availability.
Rising prices of energy and commodities that have hit consumers have also affected the manufacturing sector. Peter Hemington, a partner at BDO, said “the government could do more to help UK manufacturing, particularly by encouraging both lending and investment in the sector”. Offering support to the flagging manufacturing sector could be a key factor in rebalancing the UK’s economy.
A BDO survey which observes optimism in business performance has found an Optimism Index of 93.0 in the current climate. This has increased in recent months although the scale determines that growth is not indicated until a score of 95 is reached on the index.
Overall UK businesses seem to be heading in the right direction and resurgence in the services and other sectors will undoubtedly have a positive impact on manufacturing, reasserting the UK economy to its full strength.
Tax havens used by UK’s top companies
There are various areas of UK tax legislation allowing loopholes for tax avoidance. Recently companies such as Google, Amazon and Starbucks have been criticised by the media for making use of this to legally reduce corporate tax bills.
Further research by the charity ActionAid into the full extent of tax evasion has shown that from the 100 biggest public companies in the UK there are over 8,000 subsidiaries or joint ventures in onshore and offshore tax havens. Only two out of the hundred companies on the UK FTSE list had no subsidiaries in tax havens.
At the UK chaired G8 summit David Cameron announced that tax avoidance is an issue that needs urgent attention. However, taking action on this subject is a huge challenge considering that 1,685 subsidiaries in UK Crown dependency locations such as Bermuda, Gibraltar and Jersey are used by FTSE 100 companies.
Onshore tax havens are also used prolifically. Delaware in the USA and the Republic of Ireland are renowned for their low taxes and lightly regulated business environment. The EU has been continually leaning on the Republic of Ireland for a reform of their tax haven policies.
Of the top ten users of tax havens, four of the UK’s biggest banks are up there, including Barclays, Lloyds TSB, HSBC, and the Royal Bank of Scotland. Major retailers and food manufacturers also made it to the top section of the list, demonstrating the widespread the use of tax havens across all sectors of business.
The extensive nature of onshore and offshore tax haven use poses a huge challenge when it comes to making preventative changes. Changes are undoubtedly needed but when they will be implemented and how effective they will be remains to be seen. Until then, the loopholes that are available enable legal tax evasion.
Slight rise in US retail sales in April
Two thirds of the US economic activity is made up of consumer spending and after a 0.5% decrease in March, US retail sales increased by 0.1% in April. Although only slight this is the biggest rise in 9 months.
The statistics released by the Commerce Department suggest that consumers are increasingly spending money in the commercial sector. This is an upturn for the overall economy as well as businesses operating in the US.
The consumer spending part of US gross domestic product relates best to core sales which exclude petrol, cars, and building materials. These sales saw a rise of 0.5% projecting a positive message from the GDP.
Other areas also prospered: car sales in April increased by 1%, clothing sales by 1.2%, and sales at general merchandise stores like department stores by 1%.
The fact that more people are spending money in key consumer areas is positive both economically and commercially. Businesses investing or already invested in the US can rely on consumers to generate sales and drive business forward, even in testing times.
Greece and Cyprus EU-IMF bailout funds due
Eurozone finance ministers have recently met in Brussels to discuss Cypriot and Greek bailout payments. The first €3bn has already been approved for Cyprus within the country’s bailout plan. The next financial instalment for Greece has yet to be signed off by ministers but is set to be in the near future as the country continues to regenerate its economy.
Another country involved in the international bailout plan is Slovenia, which is expected to appeal to the European authorities in the wake of Greece and Cyprus’ aid. However, the Slovenian government have attempted to re-establish the banking system, privatise various state owned companies, and raise taxes in a bid to prevent a bailout.
From Greece’s €240bn bailout which was first agreed in 2010, €7.5bn is due to paid out in order to compensate for bondholders and workers’ wages and pensions. The International Monetary Fund (IMF) which is part of the troika and one of the major international lenders involved in the bailout plan had praised the way Greece has handled its budget deficit over the last three years, stating that progress had been made in the country.
However, its attempts at economical structural reform have not been as successful, being targeted as “insufficient, and tax evasion issues still need to be addressed. Additional austerity measures imposed to ensure stability in the country are a condition of Greece receiving further instalments of its bailout and the country must adhere to these in order to make a full recovery.