Financial Review 7th November 2014

Eurozone ‘must try harder’
The world faces a prolonged period of sluggish growth as it struggles to recover from the recession, according to the International Monetary Fund. Its managing director, Christine Lagarde, has warned of grey clouds hanging over the global economy. She said the recovery has been disappointing, with the global economy weaker than the IMF thought would be the case six months ago.

The UK continued to deliver the best performance, with growth of 3.2% this year and 2.7% forecast for 2015. The US figures are 1.7% and 3% for 2014 and 2015. But the eurozone remains by far the biggest cause for IMF concern, with rates of 1.1% and 1.5%. The IMF says it wants all countries, and the eurozone in particular to “aim higher and try harder”.

Secretive cuts to rates by banks
Savers need interest rates to rise fourfold for their incomes to recover because banks have made secretive cuts to payouts over the past two years. Since 2012, there have been severe reductions in returns despite the official bank rate remaining static.

Some savers will this year receive more than £2,000 less for each £50,000 invested, compared with two years ago. Experts say it could now take more than three years to make good the losses. Savings Champion, which conducted the research, blamed government policy which gave the banks access to billions of pounds to lend to mortgage borrowers and small businesses. Banks then cut rates because they had less need for savings deposits.

Two years ago the Government initiated its Funding for Lending Scheme, which gave banks access to £80 billion of cheap finance. Since then, nearly every bank and building society has made cuts to savings rates, sometimes without notifying customers. Savings Champion says interest had been reduced on 2,489 different accounts since January 2012. The average rate on the best five savings accounts had dropped by more than half, moving from 3.18% to 1.41%.

Pocket money rises twice as fast as pay
Children’s pocket money has risen more than twice as fast as their parents’ wage increases since the late 1980s. On average, a child aged between eight and 15 receives £6.35 a week – a sum that has surged by 462% since 1987, according to Halifax. Over the same 27-year period, the typical annual wage has increased by 188%. In return for their bumper pocket money payouts, two-thirds do some form of household chore.

Pensioners forced into equity release
Retired homeowners are being forced to borrow a record £4 million a day against their properties because a savings crisis has left them too little to fund retirement. Pensioners in their sixties and seventies in particular are turning to equity release, an expensive type of borrowing which typically lasts for life. The sum lent to the over-55s reached a record high between July and September, despite consumer bodies warning that equity release should be seen as a last resort. More than £375m was borrowed in the three-month period, according to the Equity Release Council, the industry trade body.

Low savings rates have hit elderly people who relied on the interest to supplement their pensions. Many have also found that money in pension funds has provided a much lower income than forecast. In the early 1990s, a man aged 65 could have turned £100,000 into a lifetime income of more than £15,000 a year by buying an annuity. Today, someone of that age would be offered nearer £6,000.

Whatever happened to empty nesters?
A quarter of British people over the age of 50 still have adult children living at home, with almost half not making any contribution to household bills. Parents are paying out the equivalent of just over £3,700 a year to feed and accommodate their offspring over the age of 18, who are struggling to spread their wings because of housing costs or university debts. Others are helping out by lending money to those who have already flown the nest.

First children are the most likely turn to the bank of mum and dad for a loan, according to research commissioned by the insurance company MetLife. Financial experts have warned that the baby-boomer generation could be jeopardising their own retirement prospects with their generosity to their grown-up children.

Tesco scandal reveals widespread practice
Supermarkets are making as much as a third of their profits from suppliers by demanding the type of charges that have led to the accounting scandal at Tesco, according to The Mail on Sunday. The sums include penalty charges for late or incomplete shipments, bonuses for hitting sales targets, refunds for promotional discounts and one-off payments for a multitude of reasons such as launching new products.

The scale of what is known in the industry as ‘commercial income’ is not spelt out in the financial results of supermarkets. Its crucial importance has only begun to emerge in the wake of the Tesco fiasco. The fees are lumped in on top of simple retail profits and they can grow to huge sums when large supermarkets negotiate lucrative deals with suppliers. The over-estimation of Tesco’s half-year profits by up to £250 million is believed to relate directly to the miscalculation of the commercial charges imposed on suppliers.

Groceries Code Adjudicator Christine Tacon is believed to have warned Tesco last December that it should not have been asking for such payments.

Most firms report higher business levels
Evidence that the economy is gathering pace continued in a poll that found a majority of companies were reporting higher business levels. Figures from the CBI and accountants PwC found 60% of firms said business volumes were up while 11% said they were down in the three months to September, giving a balance of plus 49% which was the best reading since 2007. The report said the momentum was expected to continue into the final quarter of 2014.

With strong broad-based growth, financial services firms are relatively upbeat about future prospects. The poll found firms had returned to hiring, with employment in financial and insurance businesses forecast to be over 1.15m by the end of 2014, or 28,000 higher than the year before. The number of jobs being created in the City of London also increased by a third in September.

Low wages spell treasury shortfall
The Treasury is likely to see less income tax than expected flowing in to its coffers due to a mix of low wage growth and a large number of people employed in low paid jobs, the Office for Budget Responsibility has warned. The OBR said the shortfall was likely despite unemployment continuing to fall. It claims the Exchequer does better if wages and salaries rise as a result of people’s earnings going up than if employment goes up. This is because higher wages pull more people into higher income tax brackets. If employment is rising on its own it brings in more people at the bottom of the tax threshold.

Official figures showed that in July 73% of the UK population was employed, with the number of people in work having risen by 74,000 from the previous quarter to 30.61m. Just over 2m people are out of work, 6.2% of the workforce, the lowest unemployment rate since 2008. However much of the rise in employment has been fuelled by an increase in people in low paid jobs, as well as a rise in freelancers, which adds up to lower earnings and less income tax.

Parents postpone retirement and stump up
Parents are having to put off retirement for several years to fund their adult children’s lifestyles. Daughters are the most expensive, costing £35,920 between the ages of 18 and 30, compared with £30,251 for sons. The biggest expense is university or higher education fees, to which parents contribute an average of £5,482 per child. This is closely followed by helping young adults with house deposits (£5,218) and funding wedding celebrations (£4,903 per child).

Surprisingly, 71% of parents continue to provide their adult children with an allowance, topping up their incomes by an average of £3,115. In the survey 44% of parents said that as a result they would have to retire three years later than planned, while two-thirds have had to raid their savings to support their children.

Middle aged least likely to save
People aged 35 to 54 are the most likely to hold no savings, the latest quarterly survey from National Savings and Investments has revealed. Its research shows 24% of those aged 35 to 44, and 23% of those between 45 and 55 currently have no savings. But only 6% of those aged over 65, and 11% between 16 and 24, are in the same boat.

The amount saved as proportion of income had been rising but this summer saw a fall. Last autumn, 7.8% of income was being saved each month and by spring this year it had risen to 8.2%. But this has now slipped back to 7.6%, or £101.66 a month. This is still ahead of 2007, when it dropped to 6.2%.

Fears deflation could spread
After a two-year break, the eurozone is back in the firing line as the news goes from bad to worse. Inflation in the single currency zone fell from 0.4% in August to 0.3% in September, according to the official statistics agency Eurostat. Prices are now rising at the slowest pace since the depths of the global downturn in October 2009, fuelling fears that the eurozone is heading for a disastrous bout of deflation.

A number of countries are already suffering from deflation, including Italy and Spain as well as Greece, Slovenia and Slovakia, as the falling oil price, squeezed pay packets and weak demand take their toll. Deflation, or falling prices, can cripple economies because it makes debts harder to service and can lead to people putting off investment and spending, because they wait for prices to fall further.

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