Tag Archives: Economy

The Earnings Expectations Gap – 18% worse off than expected by 2013?

Please click on graph for larger image.UK real earnings analysis 2000 - 2013

With the latest inflation figures and earnings growth being announced this week there has been a lot of talk about the squeezing of real incomes. A few weeks ago I put together this graph but hadn’t got round to publishing it.

The graph shows the trend in average real earnings (the black line) based on earnings growth less the CPI measure of inflation since 2000. I used CPI to reflect buying power though some might suggest RPI would be better to reflect total living costs. However I suspect the story would be similar. The future data is based on the May Bank of England quarterly inflation report and I have assumed earnings growth of 2.5% per annum for the next two and half years.

You can see that the trendline steadily rises to a peak in March 2008 when on average we were around 22% better off apparently than eight years before.

Since then things have gone rapidly south. The graph estimates we are about 5% worse off now than in March 2008 and will be a further 4% worse off by the end of December 2013. In fact by the end of December 2013 the analysis predicts we will be only as well off on average as we were at the end of 2004, nine years earlier.

But worse still is the “Expectations Gap”. This represents the difference between what we would have expected had the pre recessionary trend continued and what we are actually likely to experience.

This gap says we are 11% worse off now, and will be 18% worse off at the end of 2013 on average than we expected to be.

No wonder it feels so painful.

What the world needs now…

Stephen Waddington MD of the newly born (from the merger of Loewy’s PR firms) Speed Communications, posted yesterday about the recession and as he so clearly put it “bollocks to denial and despair”. I started writing a comment and then realised it was getting rather lengthy, so hence this post. I strongly advise you to read it first.

Firstly, and very importantly, I would strongly suspect that everyone so far in this conversation sympathises greatly with those who are suffering the “human” cost of the recession pointed out by Linda in the comments.

I also I agree with the point raised by Stephen Davies – we have got fat. The West has consumed and consumed, fed through a diet of credit financed by the East to feed its own desire for economic growth and facilitated by bankers’ personal greed. My personal favourite observation of this is the massive growth in storage centres. We have all bought so much “stuff” that we have to hire somewhere to store it! We are therefore going to have to have some degree of “pain” while we lose the weight.

It seems to me the key point of the post though is not whether the recession is causing/will cause suffering – unfortunately that is a given – but whether an attitude of despair or denial is likely to improve the situation?

In this regard I find myself agreeing with the quote that Bill highlights “we can have a depression if we really want one”. The problem is we haven’t had a recession with 24/7/365, always on, accessible from everywhere, fighting tooth and nail for attention, media coverage. The internet was literally in its infancy and mobile telephony and 100+ channel broadcasting were not widespread in 1990-92 so it was arguably easier to try and remain positive. In the face of such relentless negativity it is easy to see how people despair.

What we need is leadership. Leadership of the kind Barack Obama showed in his Inaugural address – things will be tough, hard work will be needed, but if we believe in ourselves we can achieve great things. For me the key distinction highlighted in the piece Linda links to is action. Making decisions, taking opportunities, changing, responding, not just accepting. This is what leadership is all about. We might make mistakes, but at least we tried to ride the wave of change, not let it wash over us.

Unfortunately Mr Obama is a bit of a one off. However in our own industry it seems to me that posts like these from Stephen are trying to show leadership by asking us all to focus on the positive. As an accountant, and therefore a bit of an outsider, I am inclined to think that the PR industry, as communications experts, has an opportunity to lead the way in trying to get a more positive conversation started.

A grade 3 back and sides and a trim on top

That’s what I ask for when I go to get my haircut – next one is due on Friday as it happens. Lee, who cuts my hair, understands what I mean by a “trim”. I don’t walk out looking like I’ve just been scalped – I have little enough hair as it is :)

With all the excitement yesterday over Lehman Brothers, the announcement that China was reducing interest rates got a little lost in the mix. The announcement was significant though as it represents China’s first cut in interest rates in 6 years. The cut was 0.27% from 7.47% to 7.20%; however two pieces of media coverage described this change in very different ways. The BBC described the change as a “trim“; however The Times view was that China had “slashed” rates. Now I don’t know about you, but if my bank told me that my mortgage interest payment had fallen by 3.6% (0.27%/7.47%) I wouldn’t really consider it had been slashed.

The serious point here is that in my experience the language that is used in reporting economic and financial matters can sometimes suffer from a lack of consistency. Share prices “plummet“ when the fall is a little over 1%, house prices “crash“ when they fall 2%, but oil prices only “fall“ when they reduce by 5%.

The lesson this has taught me though is if I ever need to get a haircut anywhere else I need to check first if the person about to cut my hair ever reads The Times!

A £600m stamp and it’s still second class

Today’s announcement that the stamp duty threshold has been increased to £175,000 for the next year raises some interesting questions. Was it a coincidence that this announcement came on the same day as the OECD announced the UK would go into recession in the second half of the year? Let’s be generous and say that it was. However the wonders of the stamp duty system leads to this creating some interesting numerical anomalies. The stamp duty bands will now be as follows if I understand correctly:

0% – up to £175,000
1% – £175,001 – £250,000
3% – £250,001 – £500,000
4% – £500,001+

This means that if I buy a property for £175,000 I pay no stamp duty. But if I buy a property for £250,001 I pay£7,500 in stamp duty. This means I have to pay £7,500 more to buy a property that is £75,000 more expensive i.e. 10% of the extra cost of this property. Pressure had already existed on sellers just above the £250,000 level to reduced their price with the previous increases of the exemption in the last three years to £120,000 and then £125,000, but this change just made that pressure even greater.

The change may benefit housebuilders of properties between £125,000 and £175,000 as effectively the taxpayer has just subsidised the sale of those houses in that price bracket by 1% of their value, but it probably won’t help chains greatly due to the presence of the same substantial level of stamp duty on properties greater than £250,000.

The estimate of £600m also only represents less than 10% of the tax receipts from residential sales – a relative drop in the ocean. Delving further highlights the Treasury’s reliance on the tax generated from the higher bands. In 2006-7 (the last year I can find this analysis for) the stamp duty generated on sales of properties above £250,000 was £5.07bn of a total of £6.45bn, nearly 80% of the receipts. This compares with only £1.64bn of a total of £2.69bn in 2001-2, approx 60% of receipts.

This means that of the £3.7bn of additional receipts in 2006-7, £3.4bn came from the higher bands.

Conclusion – today’s announcement is all about trying to create a perception of action, when in reality the Government has become so reliant on this income stream that it can’t afford to reduce the amount it receives by very much so it looks for the way that will create the biggest headline for the smallest cost.