Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: BP sues the US government. Survey points to rising employment pick-up. Are wages rising or not? A double Dutch recession. Thailand’s new threat
BP sues the US government
As you know BP is not exactly America’s favourite company these days. It is so hard to be objective on this one. The point of view from this side of the pond is that the company is a victim of bias. It has been tried in the court of US opinion and found guilty. No matter how much it protests, saying US companies such as Transocean and Halliburton were just as culpable as it was for the Gulf of Mexico oil spill; no matter how much it complains about compensation being awarded to people and companies whose claims for damages were spurious to put it mildly; no matter how much it claims US lawyers are making money via practices some may consider a tad excessive, the cost to BP continues to escalate. The company has even been slammed by a US Judge for daring to question the objectivity of the process
But then again, BP is easy game. We all witnessed it at school. One boy or girl was singled out by class mates; they could do no right, but could not complain about being bullied, because, or so it was said, it was their fault. Such is the mentality of the mob – and we kid ourselves if we think this psychology does not apply to the media, the electorate, the markets and even, on occasions, the judiciary.
Then again, this is a biased view point. Maybe BP was found guilty in the court of US public opinion because it was guilty. Not just guilty for being either partly or wholly responsible for the oil spill, which is clearly the case, but guilty of not caring – not caring about human lives, about the environment and only caring about profits.
But what about subsidiaries of the company that were not connected to the Gulf of Mexico oil spill – other, that is, than the fact they were part of BP.
BP is barred from obtaining new federal contracts, but now BP is suing the US government and filing a law suit in southern Texas, claiming the US government is causing it “irreparable hardship”.
The US government is of course doing precisely that, but the key question relates to whether it is justified in doing so.
And getting a fair answer to that question may yet prove impossible.
Survey points to rising employment pick-up
The data out from the ONS yesterday on UK employment was nothing special. Unemployment dipped by 4,000 between April and June compared to the previous three month period. That amounts to little more than a gentle murmur in the midst of a gale force wind. Employment rose by 69,000. UK unemployment still sits at 7.8 per cent, however, which is not bad considering the state of the economy, but just not getting better as quickly as we would like.
On the other hand, something may be going on beneath the surface. The latest Purchasing Managers’ Indices were encouraging. According to Markit, they “indicated that firms took on staff at the fastest rate since October 2007, with headcounts rising for the seventh successive month.”
Apparently, the improvement was led by services, although construction employment grew at the sharpest rate since 2008, and manufacturers boosted workforce numbers by the greatest extent for two years. The rise in employment in the construction sector, at least points to the upside of George’s help-to buy scheme.
But there was evidence of a revival in employment from another source too. The latest CIPD/Success Factors Labour Market Outlook revealed findings to make even bears feel bullish. The report shows that the net employment balance – which measures the difference between the proportion of employers who expect to increase staffing levels and the proportion who intend to reduce staffing levels – stands at +14. This is an increase from +9 in the previous quarter and is the highest figure since the recession in 2008.
Just bear in mind that if UK unemployment falls to 7 per cent, under forward guidance the Bank of England is committed to upping interest rates. If the surveys are to be believed, then it is possible that rates will be rising much sooner than the markets are currently suggesting is likely.
It all depends of course. It depends on whether the surveys are to be believed, whether they remain as positive over the next year or so, and indeed, whether in the event that unemployment does fall to 7 per cent and inflation dips to below 2 per cent, forward guidance is not, retrospectively changed.
Are wages rising or not?
For some time now it has been suggested here that a sustainable consumer led recovery can only occur in the UK if real wages rise. Just to be clear, the difference between a sustainable and unsustainable consumer led recovery is debt. If real wages do not rise, but demand does, that must mean debt has gone up, or at least that savings have fallen, and that is not sustainable.
In the three months to June wages including bonuses rose by 2.1 per cent. If, that’s IF, inflation falls to 2 per cent as many expect within a few months, and wages can carry on rising at this rate that will mean real wages are rising.
It is just that the ONS said April was an exceptional months for bonuses. The ONS has regular pay (that’s without bonuses) rising by just 1.1 per cent.
According to the latest CIPD /Success Factors Labour Market Outlook (see item above) employers do not expect wage growth to accelerate significantly. Among those LMO employers planning a pay review in the twelve months to February 2014, the average anticipated settlement for basic pay (excluding bonuses) was 1.7 per cent, which was unchanged from the previous quarter.
As was suggested here the other day, the only way real wages can rise in the long run is if productivity can rise. See: This this link
A Double Dutch Recession
Yesterday’s data on Eurozone GDP revealed that the region has come out of recession, but that Holland is very much still in one.
It is worth pausing for moment, and taking stock of the economic ills of the Netherlands.
Its government is a big fan of austerity. It is Germany’s greatest ally they say in the fight against government fecklessness, and it is a great supporter of the credo ‘live within your means’.
It is just that, according to OECD data, Dutch gross household debt to gross disposable income is no less than 285 per cent. That is almost twice the UK level (146 per cent), which we all know is too high.
Why is that? It is because for years the government of Holland subsidised mortgages, pressed the housing market button, and the Dutch themselves were lured into to the magic of leverage, via the belief that in a country where land is so short in supply house prices can only ever go up. It is just that since the end of 2010, house prices in Holland have crashed, with little sign of an end in sight – although house prices across the Netherlands are no longer that high compared to historic averages.
The second part of Holland’s double dip recession has been nasty, but that is what happens when an economy grows on the back of a housing boom and leverage. But what will happen if the result of all this is a major Dutch banking crisis forcing a government bail-out?
But here is the real puzzle. How can it make sense for a country’s government to rattle on about austerity, of living within one means, while at the same time encouraging households to run up debts?
That may sound like double Dutch, but it appears that this is a language in which George Osborne is fluent.
Thailand’s new threat
Not so long ago, this column quoted Matthew Dobbs, fund manager of Asia ex Japan equities at Schroders. He waxed lyrical about the investment opportunity that is Thailand. See: Should investors look towards South East Asia? . In the interests of balance it is important to tell the other side of the story.
Between 2006 and 2012 Thailand’s credit as a share of GDP rose by 50 percentage points. Capital Economics put it this way: “In Thailand’s case, credit expansion has primarily been driven by consumption, raising risks of an unsustainable consumer boom. Personal consumption loans have grown by an average of 17.1 per cent y/y since 2010, compared with average total loan growth rate of 12.3 per cent during the same period. Households are now trying to sustain debt repayments equivalent to 33.8 per cent of their income.”
Does that mean it will be like 1997 all over again? Capital Economics thinks not. For one thing this time around its current account is much stronger, and for another thing much of the rise in debt has been funded internally.
But just because a catastrophe of the proportions seen in 1997 may be avoided, that does not mean Thailand does not have challenges. Krystal Tan, Asia economist at Capital Economics, said: “Even if a crisis is avoided, Thailand will feel the repercussions of its recent credit binge. Credit growth needs to slow, which means the economy will lose one of its main drivers of recent years.”
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees