London, Asharq Al-Awsat – Once again I have been in east London to see some spectacular sport. Yes this week saw the start of the London 2012 Paralympics and I was there to enjoy the first four days. What really inspired me are the dedication and the commitment made by these athletes. One of many shining examples of courage comes in the shape of Martine Wright, a survivor of the July 7 bombings. She lost both her legs in the 2005 atrocities, but through determination not to be defeated by a few lunatics, her fighting spirit ensured that she was able to re-build her life and play in Britain’s sitting volley ball team. What also made me think hard is the way in which intolerance can be defeated: one example is Iraqi athletes competing harmoniously with Israeli athletes.
When many of the medallists are interviewed and asked how they achieved their success, the answer is always hard work and determination. This is a lesson for all of us if we are to re-create growth. Governments need to adopt a fiscal plan that will encourage the private sector to be successful: a fighting spirit that will reward hard work and determination.
David Cameron, the British Prime Minister has vowed to show “fighting spirit” as he prepares to announce a series of measures designed to promote economic growth. Reducing the deficit by 25% and demonstrating to the markets that the British government is serious about re-balancing the British economy, Britain enjoys exceptionally low borrowing costs. This of course would not have been possible had Britain joined the European single currency. Britain benefits from being in Europe but not part of the eurozone. That allows independent fiscal policy which has ensured the safe haven status that it enjoys.
The government will outline details of housing and infrastructure projects to coincide with the return of Parliament after the summer break. It is anticipated that the government is to use its low interest rates to underwrite up to £50bn of private sector building projects which need finance, in an effort to boost growth. There will be huge opportunities for anyone who is involved in the construction sector and in the supply of construction materials. Of course there will be many other business opportunities as this new construction starts. Ever closer ties between Britain and the Middle East will benefit both.
Another lesson this week is that some economic data is at stark variance with what is taking place in the real British economy. Inconsistencies are often apparent in the thinking of economists. The forecasts are gloomy but the reported business activity does not bear out some of the economic data. While economists are predicting a further slowing of the economy, other activity is positive. The British Land Registry data showed that London again proved to be the driving force behind continued house price rises in July with average increase of 2.7%. This is completely at odds with a slowing economy. Another dichotomy is in the construction sector. One banker that provides equipment finance told me that whilst the official figures show a huge drop in construction activity, his bank has not seen any reduction in finance for construction equipment and also that bad debt is running at 30% of that which they had expected. That clearly does not support the poor official economic figures.
A counter-cyclical point was reported in CityAM, a London morning business newspaper. London could soon be hosting another derivatives exchange, with reports over the weekend suggesting that CME Group (Chicago Mercantile Exchange) is planning to open a new European market based in the City. The addition of a competitor to take on the London-based NYSE Euronext’s Liffe and Deutsche Bourse’s Eurex in Frankfurt could be a major step in shaking up the structure of the industry – no new licence to operate an exchange has been granted by the FSA for more than five years.
Among the good news stories this week is that WPP, the world leader in marketing communications services, has endorsed the British Government’s changes to overseas tax rules by moving its base back to Britain. Recent tax changes have made Britain again a place that international companies are returning to because it is a competitive place to do business. Any risk of double taxation on overseas earnings has been removed. This again is a good reason to consider investing in the anticipated housing and infrastructure boom that will shortly begin in Britain.
David Wootton, the Lord Mayor of London remarked last week that after an incredible few weeks for the UK, London 2012 has shown the very best of Britain, with athletes from over 200 countries coming to demonstrate their excellence. He pointed out that the British do well in sports that require technical excellence. And the same is true of their approach to business. Returning to a theme I have been following for several weeks it is true that Great Britain has a reputation for high-class, high-value, innovative products and services.
Great Britain is home to many top world class businesses, all with the common denominators of committed, talented staff, high-quality products with good penetration in Britain’s export markets, and few problems accessing funding. If these businesses are to grow and continue to create more jobs and growth for Britain, its financial services sector has to remain strong. Only a sophisticated and globally-connected financial services sector is capable of delivering the depth and breadth of financing that British business needs. Even with the onslaught of possibly politically-motivated offensives from US regulators the British financial services sector is at an advanced stage of transformation and rehabilitation. It will come through the current difficulties in better shape and then go from strength to strength. It greatest strength is that it has always been robust and pioneering. Also bank shares are particularly low at present., which might be good for medium term investors.
By comparison in Greece unsustainable public sector wage and pension commitments drove the debt increase. The structure of the Eurozone as a monetary union with one currency but without fiscal union and with different tax and public pension rules contributed to the crisis and harmed the ability of European leaders to respond. European banks own a significant amount of sovereign debt, such that concerns regarding the solvency of banking systems or sovereigns are negatively reinforcing the perceptions that they are struggling.
It is also widely anticipated that data next week will show how badly Germany has been scarred by the euro zone crisis as its companies fear for key European export. Three years into the debt crisis, growth in Europe’s largest economy slowed in the second quarter of 2012 to 0.3 percent and a succession of increasingly gloomy data has even raised the possibility of a second-half contraction.
The IFO business climate index, Germany’s most influential leading indicator of economic health, is forecast to slip for the fourth month in a row, confirming a change in trend. Ralph Solveen, the Commerzbank economist said, “The German economy will likely weaken slightly in the second half. For a long time the debt crisis seemed not to bother German businesses”.
Germany like Britain understands that the solution to stimulating growth is to reward hard work and determination. Some other euro zone countries are still to figure this out. The fact that Britain is seen a safe haven comes not just in government bonds but in its strong private sector and its openness to investment from other countries. The time to strengthen ties between Britain and the Middle East has never been better.