The 2014 Oil Shock

The most significant economic event of the year has to be awarded to the 2014 oil price shock.

In this chart you are looking at $30-$35 decrease in the price of WTI and Brent crude oil in the matter of 5 months.

Economists and analysts in the energy sector have been saying this shock is due to an increase in oil supply and not a decrease in oil demand.

This supply side increase should have the following implications on the world economy according to general economic theory and also economic models created by the IMF.

1) Significant short-term decrease in world inflation forecasts.

- This is because all products in the world will use oil for production at some point along their supply chain, thus this deflationary pressure on costs should have a deflationary effect of prices across the globe. Therefore inflation forecasts with this new oil price included should decrease.

2) Upwards revision of global GDP. 

- This is because there is a reallocation of resources from oil producer to oil consumers. This drop of $30/$35 dollars puts a significant amount of money back into the pocket of oil consumers that are predominantly households.

- Time lags is what causes this increase of GDP. This is because consumers who get extra dollars back into their pockets are very fast to spend it and put it back in the economy. However oil producers (90% rich families and governments - 10% oil companies) are very slow to decrease their spending, in response to falling revenues. Therefore the total demand in world economy increases and therefore leads to increase in GDP.

Has this happened in reality?

The short answer is no.

The 1st effect has. Many economies around the world have revised their inflation forecasts, such as the Bank of England now expecting inflation to fall below 1%.

Along with the European Central Bank and the Bank of Japan looking for more QE stimulus.

However...

The second condition certainly has not happened. GDP revisions around the world have been revised down, so what is happening?

- What is happening is that built into economic models around the world, they are pricing in the effects of a large economic slow down. The eurozone is slowing down and expecting a long period of deflation, Japan is fearing negative growth and China has slowed to its lowest rate since the height of the crisis.

Are these views correct?

Despite fears that the global economy is slowing down due to a variety of different reasons, which is affecting the growth forecasts of analysts around the world...when we look at a chart of global GDP we see a different story...

Here we can see on a chart that global GDP has been really stable. Eurozone weakness has been offset by USA growth and emerging markets have been stable despite a slowdown from a very incredible rate of growth.

My conclusion

I believe that market analysts around the world are over reacting to slightly negative data in recent months. Global GDP is stable. And I believe this oil price shock will prove to act as a proxy for a short term growth worldwide despite analysts expecting the opposite.

Globalisation: The global marketplace

Globalisation:

'The process that facilitates unrestricted global trade and investment flows.'

Globalisation gets a hard time in the press, but globalisation has done some of the most amazing things to our world.

Globalisation has facilitated the eradication of more poverty than any other process in the history of man kind. That's right, globalisation saves lives and lots at that.

The beauty of globalisation is that it allows poor countries to compete on a level playing field with the rest of the world. Here they can take advantage of their lower valued currency and price of living. Allowing them to create a product for less than the competition. This has been true for Africa, who have seen 6%+ growth for the five years before the financial crisis.

The poverty that foreign direct investment and world trade has eradicated is multiples of what charities have ever, and will ever be able to do.

Some of the other things that globalisation facilitates is choice. If we are able to trade with other countries, we able to have such a vast array of products and services available at out fingertips.

But not only that - globalisation allows our products to be of much higher quality, by allowing the pooling or research andspecialisation of different conpenents of the supply chain. For example Apple had 200 different countries in its supply chain from across the globe that helps with the manufacturing and design of one Apple iPhone.

The main aspects of globalisations high impact the on the world derives from the economics involved.

Comparative advantage/specialisation:

Before globalisation, countries had to produce and design all of its own products. This is virtually impossible in today's world. There is no way an independent country could produce all the products we have today, this is because of skill sets, experiance, climate, population etc... For example the UK could never consume half as many bannanas as it can today if we had to produce them ourselves.

For example say we have two countries that both produce two different products. One country could be much more efficient in the production of one product and the other country more efficient in the other product.

The only reasonable thing to do would be to specialise in what you are good at and then trade with each other. This drastically increases the output, consumption and the standard of living of each country.

We do this today in our jobs in business', when do you ever see an employee that can do every process of the firm. This firm would be inefficient, be able to produce less and thus charge a higher price and will fail because of the lack of competition.

This is globalisation, and the end outcome is higher world output consumption and standard of living

China's importance higher than ever?

Is China's slowing growth really something to worry about? 

Financial commentators, economists and journalists have contributed to the fashionable belief that China's prospects aren't as prosperous as two years ago. 

However anyone who believed China's growth would stay at 10% for ever is some what deluded, and this drop off in growth is something that should have been completely expected. 

Structural growth and cyclical growth are two things that are constantly ignored by financial press and commentators. GDP figures are regularly interpreted as being regressed from variables that are exclusive to China's economy, however this is completely wrong. 

Structural growth is something you can only interpret over time in order to factor out business cycles when looking at growth figures. This is easily proved by looking at Chinese GDP growth from 2009-2010. GDP in 2009 was half of 2010's figures. Proving that external factors play a big part, despite the structure and potential of China's economy not changing in the slightest. Cyclical growth is growth, + or - an output gap that is determined by external factors. 

China's growth has slowed to around 7.5%, and according to Jim O'neill, ex chairman of Goldman Sachs, this will be trend growth for the country from now until 2050.
Thus emphasising the fact that China's influence has not decreased due to lower GDP growth, but more the fact it's prospects are the same, but growth has just fallen back to the trend line. 

Quality v Quantity?

In the western world, the chosen path for growth has been quantity. Grow as much as you can, as quick as you can. This can certainly be shown by the current private and public debt to GDP ratios of the worlds major economies.

The 'Spend now, worry about it later' philosophy. 

Policy makers have taken a completely different approach to this, and actually would be concerned when growth becomes too high for what they believe is their stable growth figure. 

They also want fair growth, and want to ensure that inequality does not get out of control. They have done this by sharply increasing wages to try and stay in line with growth, as opposed to leaving all growth to go to corporations which is seen in the western world. Construction growth has increased by over 3x in the last 10 years alone. 


What's next?

With trend growth over the next 36 years to be nearly 8%, more than double of world growth forecasts, you will begin to see China dwarf most other economies around the globe. In PPP terms, China is already larger than the states. 

This will drive pressure on the Chinese to become more involved with world policy making, as opposed to the US having a monopoly. This will make China the place to export to. Along with this you could potentially see world wide corporations emerging from China, along with current firms migrating their for greater talent. 

My advice: 

Don't underestimate China's growth, oh, and learn Mandarin. 

German supremacy slowing?

Germany was one of the least affected countries in the world at the height of the financial crisis. It's economy managed to hold up, and even had enough spare cash to bail out every barista in Spain. 

However is their supremacy at the beginning of the end?   

German growth has been higher than the euro-zone average every quarter apart from one, throughout the whole of the financial crisis, however now faces falling into recession, as it anticipates the 3rd quarter growth data. 

Manufacturing is down nearly 5%, the first time it has done this since the height of the financial crisis. A whole 3x bigger than what analysts anticipated. 

Germany is the pin up boy for the euro-zone project, and was the leading economy politically and economically in the project.
However could this now be coming to an end? 

The euro-zone currently faces a deflation and growth problem, and with fears of a German recession, contagion could kick in with FDI flight from the euro-zone, and could see the euro-zone back to square one. 

Germans rely heavily upon exports, with their strong export business with the likes of BMW, Audi and Mercedes at the forefront of that. With global growth being sluggish, and one of their main export partners China experiencing a stuttering of their economy, this could see exports fall dramatically for the Germans in the future.  

However despite these fears, Chancellor Merkel could look for a supply side policy to shift GDP upwards. Germans often complain about the state of their infrastructure such as their roads, railways, water ways and their airports. Thus you could see some investment coming into them soon to try and ramp up their economy, and stump a recession and contagion before it's too late. 

Where is the UK economy at the moment?

Current Status of the UK

The Economics:

The UK has been one of the top performers in the western world, in response to financial crisis. This is after a very controversial austerity package rolled out by My Osborne.  

GDP is still strongly positive, in Q2 at 0.9%, this is compared with 0.8% from Q1.

Inflation is ticking down from 1.6% in July (annually) to 1.5% in September, this is just shy of the Bank of England's 2% target. This represents the fact that the UK's growth is mainly supply side as opposed to demand side. 

Unemployment is still under the sacred 7% that was talked about by Mark Carney, the governor of the Bank of England. It is down 0.4 percentage points from February-April 2014.
The rate is currently 6.2%. 

Despite this 'strong data', investors are still wary of the rate of growth the UK can produce, as it sees a slow down in construction and exports. The trade deficit narrowed from £3.1bn in July to £1.9bn, which was on the back of poor export data.
Economists believe the underlying trend looked bad for the UK, as it looks to rebalance away from domestic demand to selling more abroad.

Markets:

Sterling continues to strengthen against the Euro, and is up 7% over the last year.
This is due to data continuing to be stronger than the Euro average, and continues to look the same over the next couple of years as Europe continues to struggle with growth and deflation worries. 

Additionally cable is up 11%, this is due to rebounding UK growth, and investors are anticipating a rate rise on the back of some more strong manufacturing date in the summer.
The Bank of England look set to be the first central bank to raise rates in the wake of the financial crisis. 

The FTSE 100 struggled to surpass it's resistance at the 7000 mark, which is the pre-crash high. This is contrary to its US counterpart the S&P 500 which smashed through it months ago. Since hovering around this mark, the FTSE has began to down trend, and has been trending down now for a month.
The current close price of the FTSE 100 is 6,294.

This gilt yield curve shows that yields for all government bonds of all maturity dates, have a lower yield that was priced in a week ago and a month ago.
This suggests that investors are becoming ever more uncertain about the likelihood of a rate hike, that they were in the summer.
This is to do with the recent economic date coming out since the summer.

Conclusion: 

The UK economy is still in a strong position, however growth is starting to slow down, and investors are reacting strongly to this with a large sell off of the stock market, and lower yields.
Investors I believe are wary due to the fact Mark Carney did not deliver on his promise to increase the rate at 7% employment, which ask questions about the real state of the economy.
However when the ever anticipated rate hike does happen, I believe business and consumer confidence will be restored, and we may enter a little boom. 

But don't get your hopes up!

The flash that will cost you a lot of cash: New financed cars

Financed cars are becoming ever more alluring to young people who have recently got on the job market, a chance to drive around in a brand new car, looking cool amongst friends etc... You regularly see adverts on the TV or on billboards saying 'Buy now for only £75 per week'

On the surface this can look like a reasonable purchase, especially in a £15-£20k starting salary job with no outgoings. However I would argue the exact opposite.

I have done a bit of light research and looked at the figures and was shocked by how mad of an investment financed cars are.

I looked at a BMW 116 d as I regularly see people driving around in these around my home town who can't be any older than 22.

An initial deposit on the vehicle was £299 with monthly payments of £348 (Inc interest) over the course of 47 months. On a car that is worth £22,359.39, that works out at a total price over the 4 years of £25,379.95 (With a one off payment of £8707.50). Already a loss of £3,020.56 on interest payments.

Of course the argument you could say is that after the whopping £25,379.95 price tag, you still retain the car at the end of it which is an asset and has a resale value. I then looked at the equivalent model but 4 years old, to come up with a rough estimate of how much the car would be worth after the 4 years. I found the model up for £7,595.00, which would mean the buyer of the car would have lost £17,784.95 by the end of the 4 years due to interest payments and depreciation.

Which is probably around a years salary for the young buyer after tax.

My advice: buy a second hand car, go travelling with some of the savings and stop wasting your hard earned money on materialistic products.

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The figures break down: 

BMW 1 SERIES 116d

£300 deposit
Loan payments £16,373.45

Baloon payment at end £8707.50

Total payable: £25,378.95
47 months of £348.37

Value of 4 year old equivalent model: £7,595 with 37,000 miles on the clock.

Total cost of car = £25,379.95

Depreciation loss = £14,764.39
Interest payments loss = £3,020.56

Total loss of capital = £17,784.95 @ end of 4 year term.  

Student Finance’s Ignorance to London-Living

As a student studying in London, I am fully aware of the costs incurred in living in the country’s capital. However Student Finance missed the memo.

Student finance gives loans to students based upon their parent’s household income, this allows for poorer students to receive a larger loan whilst also getting some free money in the form of a grant, to ensure that they are able to get their degree.

Another criteria that changes the amount of the student’s loan is whether you are living in London or not. Student finance’s largest maintenance loan available outside the capital is £5,555 in comparison to £7,751 for the contrary, modest 39.5% larger.

MAXIMUM MAINTENANCE (LIVING) LOAN

Academic year	Living with parents	Living away from home	Living away from home (London)	Living away from home (overseas)
2012/13 and 2013/2014	£4,375	£5,500	£7,675	£6,535
2014/15	£4,418	£5,555	£7,751	£6,600

You may think this is quite a lot and could more than cover the extra costs.
But you couldn't be more wrong!

The main out goings for a student will of course be the price of his/her rented accommodation, and this will be expected to mainly be paid for by his/her student loan. 

So let’s have a look at average rental prices in London and in the rest of the UK.

This shows average prices for a 2 bed flat in greater London (orange) compared to outer London average (yellow).
- Per person per week in London in May 2014 it cost £155.
- The average outside of London was half of that (£77.50)

Over a university term (42 weeks) the two would pay very different prices for their accommodation.
- Non-London student: £3,225
- London Student: £6510

Deducting the rent from the student loan, the two students after rent would have very different personal finances, the non-London student would have £2,330 left over to contribute towards living costs whereas the London student would have only £,1241 – nearly half of the non-London student.

This is even more shocking as the price of living is more expensive in London, so the London student is even worse off than just the hit they take from the high property prices.

But who ultimately pays this deficit of funds? The parents.

Therefore Student Finance England truly fails those students seeking a top class education from the country’s capital and the parents of these students.

Personally I would like to do a study into how much of a financial strain student finance’s cock up is on families with children that go to London universities, however I don’t have time – I've got to hunt for a job.