Financial Review 21st March

Economic recovery gathers pace
The European Commission has said economic recovery is gaining ground in the EU, prompting it to revise upwards its growth forecasts for 2014 and 2015. The Commission said that the 18-nation eurozone would grow by 1.2% this year and 1.8% next year.

While Brussels is making much of this, it has in fact only raised its figures by 0.1%. The eurozone figure hides how badly some economies are doing, which means they are being carried by Germany in particular. The UK economy is expected to grow by 2.5% this year, up from a previous forecast of 2.2%.

The Commission’s upgrades follow a similar upward revision by the International Monetary Fund.

Taxpayers pay for whitehall bonuses
The taxpayer funded £140 million in bonuses to civil servants last year, despite government promises to crack down on Whitehall pay deals. In some agencies and quangos every single member of staff received a bonus worth thousands of pounds.

The Cabinet Office has admitted that 160,000 civil servants, around 40% of the total workforce, received bonuses last year. Some of the pay-outs were worth up to £62,000, with most receiving several hundred pounds. A quarter of the 3,600 senior civil servants shared bonuses worth £8.6m.

The biggest bonus bill was at the Department for Work and Pensions, where almost £45m was paid out to nine in 10 staff. More than 60 senior officials received an average of £10,000, despite criticism of the department’s handling of benefits reforms. The Ministry of Defence gave officials bonuses worth £24m. DEFRA paid £2.6m and the Met Office, which failed to forecast the recent floods, paid £1.5m in bonuses.

Boiler-room gangs feel the heat
Criminal gangs have been arrested over a so-called boiler-room fraud in which British victims lost millions of pounds after being tricked into buying non-existent or worth-less shares.

Police have described this as the biggest operation of its kind. They believe £15 million was taken from pensioners who were desperate to beat low interest rates. The operation was coordinated with raids by other police forces in Barcelona, Madrid, and Marbella. The alleged fraudsters spent the takings on mansions in the sun, fast cars, drugs and prostitutes, pursuing lifestyles of excess likened to the plot of the Hollywood film, The Wolf of Wall Street.

The boiler-room scam takes its name from the cramped offices typically used by the fraudsters, who use high-pressure sales techniques to con investors into buying shares that do not exist or are worthless. So far police have identified 850 UK victims who lost from £2,000 to £500,000 each.

Savers count cost of rate freeze
Savers have lost a total in excess of £300 billion due to the Bank of England’s decision to cut interest rates to the lowest level in history. Research by the campaign group, Save our Savers (SoS), looked at Britain’s £1.2 trillion held in various savings accounts. It compared how much interest savers have been paid for their nest eggs, compared with how much they would have received if rates had been kept at their pre-crisis level of 5%.

The total amount of lost interest over the past five years was £117bn, the group says, with a drop in spending power of £209bn. This makes a total loss to the economy of £326bn. The savings drought has been the longest since the Second World War and its aftermath, when rates were frozen from 1939 to 1951.

Buffett trims Tesco share holding
Billionaire US investor Warren Buffett has cut back his stake in Tesco after a turbulent period for the retailer. The annual letter from his Berkshire Hathaway investment vehicle revealed a cut in its Tesco supermarket holding from 5.2% to 3.7%. However Mr Buffet still has shares in Tesco worth around £1.67 billion.

Dubbed the Sage of Omaha for his reputation as the world’s most successful investor, Mr Buffet still retains Tesco as one of his top-15 holdings, which include American Express, Coca-Cola and Goldman Sachs. Berkshire Hathaway made £11.bn last year, up from £8.8bn, but behind the rise of the Standard and Poor (S&P) 500 share index.

Low inflation a worry for Euro Bank
Persistently low inflation poses a threat to the eurozone and could become entrenched, the president of the European Central Bank (ECB) has warned. Mario Draghi said the current rate of 0.8% was well off the ECB’s 2% target, and seemed set to remain that way for the foreseeable future.

While Mr Draghi said that low inflation pressures were mainly caused by global factors, such as lower energy and food prices, high unemployment would keep demand weak, meaning domestic recovery would lag revivals in exports.

Rapidly falling eurozone inflation has led to speculation that it could fall into a Japanese-style deflation trap. Greece is already in deflation, while Spanish inflation dropped to zero in February.

Falling prices are a threat to economies because a sustained decline can lead shoppers to postpone purchases as they wait for further falls. Shops then cut prices more to attract customers, which can ultimately lead to a deflationary spiral. Deflation also makes it harder for countries to refinance their debts.

Bank complaints flood watchdog
The Financial Ombudsman Service (FOS) was deluged last year by new complaints about banks and other financial businesses. It received 576,000 complaints, which was a 38% increase on 2012, though the number eased off in the second half of the year.

In the last six months of the year, 76% of complaints were about payment protection insurance (PPI). It says over 1,000 people a day are still asking the ombudsman to sort out PPI problems they have not been able to resolve directly with their bank. Most complaints continue to be against the big banks over the mis-selling of PPI polices.

In the last six months of 2013 the most complained-about firms were Lloyds Banking Group, Barclays, RBS, HSBC and the credit card firm MBNA. Lloyds alone has set aside £10 billion to cover the cost of repayments.

Meanwhile it has emerged that claims businesses have taken up to £5bn of the compensation paid to victims of the PPI scandal. Anyone mis-sold PPI should be able to claim a refund themselves by using a standard complaints letter, but many banks made it hard for customers, allowing claims firms to fill the gap and offer to help before creaming off a big share of the money that was returned.

PAYE change flawed
A huge tax overhaul affecting all PAYE employers is badly designed with fundamental problems, the top accountancy body has warned. The Real Time Information reporting system – requiring employers to tell the tax office online each time a worker is paid – came into force in October last year. Firms employing fewer than 50 staff and paying them weekly have until next month to comply.

But the Institute of Chartered Accountants has said the reporting system was badly designed from the beginning. It says there are problems with duplicate entries, items not being processed, information which employers should be able to see not showing, employees put on the wrong tax code, and the pursuit of underpayments being based on incorrect information.

Banks’ mis-selling a thing of the past?
All the major high street banks have either replaced or made substantial changes to high-pressure financial incentive schemes that resulted in the mis-selling of products, according to a report by the Financial Conduct Authority.

The FCA says that incentive schemes, which are essentially targets that staff have to meet by selling credit cards, investments, loans and other products, played a major role in mis-selling scandals of recent years. In its latest review of incentive schemes, the FCA says it found significant improvements, but also identified a number of areas across the industry where further work was needed.

Economy to pass pre-crash level
The size of the UK economy will soon overtake the peak level it was at before the 2008 financial crisis, according to the British Chambers of Commerce (BCC). It says it believes the second quarter, starting in April, will see GDP exceed the level at the start of 2008.

In upgraded forecasts, the BCC estimates economic growth will be 2.8% this year, but it also warns of an “unacceptably high” level of youth unemployment. This forecast brings its estimate for recovery to pre-recession conditions forward from the autumn to the spring.

The BCC forecasts are echoed in a separate report, from accountants BDO. They say strong growth is being helped by increased optimism and improved employment intentions, particularly in manufacturing.

Public sector workers still better paid
In 2013, average hourly earnings in the public sector were £16.28, compared with an average of £14.16 among private employees. But analysts say one reason was because more public sector jobs require high levels of skill and university degrees.

The Organisation for National Statistics (ONS) says that when the different gender balance and age profile of the public sector is factored in, the pay difference in favour of the public sector was closer to 3% – although it is not clear if this adds in a value for the generous public sector pension arrangements.

While those in the bottom 5% of staff in the two groups were paid more if they were in the public sector, the highest-paid earners were in the private sector. The top 1% of earners in the private sector, at more than £60 per hour, earned considerably more than their public sector counterparts receiving just under £50 an hour.

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