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Virus Economics: When Markets Feel Poorly

by John Brian Shannon

Fearing that the Coronavirus pandemic might affect their investments, perception became reality for investors in the world’s stock exchanges as markets see their biggest drop in recent years.


‘Money flees uncertainty’ – You’ve heard it before or read it in print

It vaporizes during civil unrest, it dissipates into thin air when politics goes awry such as when a national leader faces a coup d’é·tat, and it leaves without saying goodbye during natural disasters. In short, the thing we call “money” isn’t our friend at all, in fact, “money” (by which, I mean ‘investment’) is the most fair-weather friend we could have.

And that’s a good thing!

(I hear what you’re thinking, “Is Gordon Gekko writing this post? You know, the whole, “Greed is good,” thing and all that?) Hehehe.

No, Gordon Gekko from the movie Wall Street isn’t writing this post, I’m merely remarking upon what’s patently obvious in the global marketplace — that the de facto rule is that individual and institutional investors prefer stable and profitable companies and countries to unstable and less profitable companies and countries. Of course.

What it means on the ground is that organizations that prepare in advance for the ‘bad times’ are seen as more stable, and therefore a better long-term investment, and that’s where the money flees to during challenging economic times.

Which is why some countries have a AAA+ credit rating and others don’t. It’s why some companies have triple A credit and others don’t. It’s why some countries need IMF loans and others don’t.


Stayin’ Alive, Yeah!

Being prepared, means staying alive, even while your competitors are dying all around you. (Not literally dying; But that’s the kind of talk you hear on trading floors during the so-called ‘bad times’)

I say ‘bad times’ because, for prepared countries (and companies) there really are no ‘bad times’.

Prepared organizations sail right through recessions, depressions, war, civil unrest, natural disasters and more — precisely because they’re well managed and well-equipped to weather any sort of storm, whether it be political, economic, or even natural disasters that can strike without warning.

Any CFO knows that recessions occur every 25-years. They know their factory (or whatever) is located in a floodplain, or in an active earthquake zone, etc., therefore, long in advance of any of those events occurring, they create a ‘rainy day fund’ to carry the company through a catastrophic period with surprisingly little upset.

The reward for this kind of long-term thinking is that when disaster finally strikes (and it surely will, it’s just a question of when) your organization will carry-on with ‘business as usual’ even as your competitors are dying in the market. It’s called ‘building resiliency’ into your company (or country) and it’s a fine thing.

And that’s the time that your company can go ’round and snap those companies up for ten cents on the dollar. ‘Picking their bones’ as we used to say in the halcyon days of Carl Icahn, investor, corporate raider… and strangely enough… philanthropist. Cool, huh?

Anyway, ‘Fortune favours the prepared’ said Louis Pasteur, and he was right.

So it follows then, that countries that aren’t prepared for Coronavirus version 2019 (called COVID-19 now that it’s been officially named) aren’t going to sail through it unaffected.

Rather, it’s easy to see even at this early stage which countries have engaged in long-term thinking, and have long ago upgraded their medical capacities to handle pandemics such as COVID-19, and although some cases showed up on their healthcare systems they had the ability and the capacity to deal with those cases with immediacy.

And if there’s one thing that pandemic-type viruses hate, it’s timely diagnosis, speedy quarantine and effective treatment.

Consequently, those prepared economies will see little economic impact from COVID-19 or any subsequent mutation of the COVID-19 virus which is likely to be called COVID-20 if it occurs in 2020. And there’s always, always, a mutation eventually, however it’s almost impossible to predict when that mutation will occur. At that time, the treatment for COVID-19 won’t work on COVID-20 (or whatever that mutation gets named) or if it does work, it’s likely to be less than 50% effective. Just sayin’.

Again, those governments that believe in long-term thinking and have prepared in advance of the latest Coronavirus pandemic have already inoculated their economies against the worst of the problem, although they could still (secondarily) be affected by other countries whose economies may now suffer on account of not being prepared.

Therefore, it was the perception of investors who have themselves created the entire ‘Black Monday’ market devaluation by pulling their investments from the stock market. But if there are more countries that are prepared for and respond well to the Coronavirus threat, then today’s market recalibration will turn out to be nothing more than a blip on the year-end 2020 annual report.

But if it turns out that a majority of countries aren’t properly prepared to handle this Coronavirus pandemic then this market slide could last a long time and worsen as thousands more become infected.

And then what happens around November or December 2020 if a new, mutated COVID virus appears?

Just as the markets get back to normal, suddenly a newer and more virulent version of this virus begins to run through the world’s healthcare systems… will they be ready then? Let’s hope so.


More Pandemics are On the Way. So, Let’s be Ready Next Time!

One thing’s for certain. In this increasingly interconnected world, there will be more pandemics and perhaps much more deadly and with a more rapid onset than the COVID-19 virus.

In such an instance, only the countries blessed with leaders who aren’t afraid to make the big decisions (like closing their airports and even their land borders and seaports for 2-weeks to prevent millions more infections from occurring) will survive the next viral onslaught.

In the case of the COVID-19 virus (so far) it looks like the major economies have dodged a bullet, because it turns out that it isn’t the strongest virus, as it’s only able to kill the elderly and the infirm. However, future pandemics may not be as mild as this particular Coronavirus.

We need to get ready. We have so far failed this drill, but Western healthcare systems are quickly ramping-up to meet the present threat. Until governments begin to provide permanent ongoing funding to healthcare providers to help them get more efficient at capturing such viral threats, isolating those who are contagious, and effectively treating those who’ve been exposed to such contagions, we’re living on borrowed time.

Let us thank the medical professionals on the front lines diagnosing, isolating, and treating those people who’ve had exposure to the virus, and thank them for doing much in a short time, with only tepid support (at first) from Western governments. Bravo!


Bonus Graphic

Markets see their biggest drop in recent years as fears of the COVID-19 virus spreads.

Markets see their biggest drop in recent years as fear of the COVID-19 virus spreads.


 

A Day in London: 2020

by John Brian Shannon

Welcome to London, 2020. You’re in the former Battersea Power Station where the British International Motor Show is being held this week!

Artist rendering of the renovated Battersea Power Station in London, UK that will be home to Apple Inc.

Artist rendering of the renovated Battersea Power Station in London, UK — Apple’s UK & Commonwealth HQ. Business Insider

Apple Inc’s new UK & Commonwealth HQ is full of Alan Turing-esqe brilliant people glad to be hosting the show in their auric new building — and for the first time anywhere, iDrive (Apple’s shiny new hydrogen powered car) is on public display.

Aside from its obviously stunning design, the best thing about this car is that it can’t be stolen because unless the owner of the car is within a few feet of the car with his/her iPhone on and logged-in to the iDrive app, it is just a piece of aluminum, glass and plastic that can’t go anywhere. There’s no computer or operating system to allow the car do anything at all, save for the iDrive app in your iPhone or iPad.

apple icar concept car in london, uk

Early Apple iCar concept.

No iPhone or iPad? Then you’re not the owner of the car. Because a matching serial number iPhone & iPad is provided with each Apple Car, with thumbprint security and as many passwords or login captchas as you want. It’s up to you.

Even if someone steals your iPhone and manages to locate your car, you can always “Log out of all devices and apps” remotely from any computer or smart phone on the planet — including the app that drives your beautiful new Apple Car. (Stolen car coasts to side of road, wholly inactive)

Now, that’s what I call a user-friendly car ownership experience.


And Brexit, You Ask? Pshaw!

Brexit came and went a long time ago. Neither Project Fear or the extreme Brexiteers were right; The UK coasted through 2019, Brexiting on March 29 as scheduled and other than a temporary blip in the markets things continued as normal. Yes, even the Sun rose in the sky the next day. Astonishing!

But not really. For all the hype, compared to other events taking place in the world Brexit turned out to be a sideshow. Only hyperventilating European politicians on both sides of the English Channel noticed Brexit.

After dipping to 1.2% GDP growth in 2019, the UK recovered and is now looking at 2% growth for 2021 — not due to Brexit — but due to the fact that Remainers are no longer sabotaging the UK economy hoping for it to fail so they could get their way.

Since the summer of 2019, the UK joined the USMCA (the new NAFTA agreement) and the CPTPP, and the new Commonwealth of Nations Free Trade Accord (CNFTA). In 2020, the UK has signed trade agreements with countries that have a combined population of 5 billion+ people.

A free trade deal with the EU (based on the excellent CETA agreement the EU has with Canada) is expected to be signed by the end of 2020 and go into effect on January 1, 2021.

Food shortages, rioting, family strife, civil war? Not a bit of it.

Every politician who tried to make a career out of Brexit is gone. Whether extreme Brexiteer, extreme Remainer, whether continental European or Briton; Every politician who held an extreme Brexit position was invited by their respective parties (and voters, hehehe) to leave politics.

Enjoy the day Britons, legal migrants to the UK, and visitors! You’ve earned it.

Oh, and the UK and the EU signed a modified Withdrawal Agreement on the 11th-hour of March 28th, 2019. But you knew that.

Why the UK Should Match Canada’s 15% Corporate Tax Rate

by John Brian Shannon

Canada’s corporate tax rate remains at 15% and that low tax rate was one of the reasons the country essentially cruised unharmed through the financial crash of 2008 and its bloody aftermath.

Throughout the global financial meltdown Canada easily led all G7 countries in growth (although Canadian growth was curtailed as compared to pre-crash projections) and the country didn’t need to increase taxes, nor make major fiscal or monetary adjustments during that period.

Corporate Income Tax Rates for Canada in 2018.

Corporate Income Tax Rates for Canada in 2018. For active business income — includes all rate changes announced up to June 15, 2018. Information courtesy of www.EY.com

Although the country isn’t thought of as an offshore tax haven by any stretch, having a 14.5% corporate tax rate during the global economic crisis (it’s since risen to 15%) meant the country avoided the exodus of capital that other nations experienced.

That reasonable corporate tax rate as much as any other factor helped Canada to survive and thrive in the face of one of the most damaging economic meltdowns in modern history.

Money fleeing the country to low corporate taxation destinations is NOT what the UK government needs any time over the next decade.


Will There be Another Recession?

Of course there will be another recession. Recessions in Western countries occur every 25-years on average although unexpected economic shocks have been known to occur. Just because the average interregnum is 25-years, doesn’t mean recessions can’t also happen randomly — which means that the UK needs to begin playing it smart, now, to better survive the next global downturn.


Why Match Canada’s Rate?

Canada’s corporate tax rate just happens to fall within an economic ‘sweet spot’ — high enough that it doesn’t get named and shamed as an offshore tax haven (which tend to get a lot of bad press when a recession is on) yet is close enough to other developed nation corporate tax rates that it doesn’t get a bad reputation.

All else being equal, you want to go with what works. And Canada’s low corporate taxation plan worked wonders to help the country coast through the last recession — and it performed even better than expected, pre- and post-recession.

Sure, there were nervous moments here and there, nobody denies that. But that 15% rate combined with a steady hand on the economic tiller by Mr. Mark Carney then-governor of the Bank of Canada (now governor of the Bank of England) and the country under the steady leadership of (then-Prime Minister) Stephen Harper added gravitas and confidence to the Canadian economy at a time it was needed.

That’s all it takes to survive and thrive in recessionary times, folks.


Philip Hammond’s Next Budget

UK Chancellor of the Exchequer Philip Hammond should match Canada’s corporate income tax rates exactly, and publicly commit to that at Spring Budget 2019. Or even better, in Autumn Budget 2018.

Due to Brexit there is a real need to write both a spring and autumn budget each year, at least until the 2-year implementation period is complete.

Lowering corporate taxes could mean less revenue for HM government. That’s a possibility. But there are positives to a lower corporate income tax rate for the UK, particularly during the present economic uncertainty:

  1. More companies will move their headquarters to the UK to obtain a better corporate tax rate.
  2. More UK companies will decide to stay in the UK rather than leave it for (perceived) greener pastures during this period of economic uncertainty, although they could well have plans to return 5-years on from Brexit. (But can you count on that?)
  3. UK-based companies will have more money to invest in their UK operations, to increase non-labour purchases, and perhaps expand their existing factories, facilities, or number of retail outlets.
  4. UK companies that presently fear Brexit may hurt their business may find that as the UK corporate income tax rate falls to 15% it gives them a competitive advantage of 5% they didn’t have prior to this (proposal). Less fear and better after-tax profits. ‘Gotta like that’ said every CEO ever.
  5. Instead of the government needing to stimulate the economy, increased spending by UK companies flush with newfound cash will help to stabilize the economy now and through the 2-year implementation period via increased spending and hiring.
  6. Hiring more workers with a 5% tax savings means more revenue for HM government — as many of those workers will earn enough to pay an average 45%-55% personal income tax rate.

That’s just a short list of the benefits of lowering the corporate income tax rate to 15% and if the tax reduction announcement is timed correctly HM Revenue and Customs shouldn’t suffer any loss of revenue — and it’s possible that HMRC may receive slightly more revenue courtesy of additional personal income tax contributions if companies go on a hiring spree with their saved money.


Here’s a bonus graphic to show *what can happen* when you cut the UK corporate income tax rate…

UK Corporate Income Tax Rate drop

UK Corporate Income Tax Rate drop increased tax revenue by 50% from 2010-2016. Image courtesy Daily Mail.